FRC publishes Audit Quality Inspections Annual Report 2014/15

29 May, 2015

The Financial Reporting Council (FRC) has today published the Audit Quality Inspection Annual Report for 2014/15 which provides an overview of the audit quality inspection work carried out by its Audit Quality Review (AQR) team for the year ended 31 March 2015 (“the annual report”). A total of 109 private sector audits were inspected.

The annual report provides an assessment of audit quality and also provides key messages that audit firms should pay attention to if they are to improve their overall level of audit quality. The annual report indicates that “audit quality is improving”.  However the FRC indicates that “there is room for further improvement”.

The AQR team monitors the quality of the audits of listed and other major public interest entities and the policies and procedures supporting audit quality at the major audit firms in the UK. The overall objective of their work is “to monitor and promote improvements in the quality of auditing of listed and other major public interest entities”.  Reviews were performed on a risk-based approach with a specific focus on FTSE 350 companies (as a result of the recommendations of the Competition and Markets Authority (CMA)) and banks and building societies.

Detailed findings from the inspection of individual audits showed that there was a continued improvement in the quality of audit work. 

Specifically the annual report highlights:

  • That 67% of all audits inspected in 2014/15 were assessed as either good or only requiring limited improvements, maintaining the improvements in grading of audits seen last year.
  • That the quality of FTSE 350 audits is higher than other categories of audits inspected with only 6% assessed as requiring significant improvements (10% for all audits inspected).  The FRC highlights that FTSE 350 work that it inspects is “of a higher standard than that of other audits”.
  • Although the level of audit being assessed as either requiring improvements or significant improvements has fallen from 40% in 2013/14 to 33% in 2014/15, the FRC remained “concerned” at these figures.  Listed companies outside of the FTSE 350 continue to account for the largest number of audits assessed as requiring significant improvement.

A number of issues were identified during the audit quality inspections, many of which were common to prior year inspections.  These include:

  • Insufficient scepticism in challenging the appropriateness of assumptions in key areas of audit judgment such as impairment testing and property valuations.
  • Insufficient or inappropriate procedures being performed. This was common to many audit areas including revenue recognition.
  • The failure to adequately identify the threats and related safeguards to auditor independence and to appropriately communicate these to audit committees.

To promote further improvement in audit quality the FRC is undertaking the following initiatives:

  • Requesting that firms develop of action plans to address weaknesses identified in individual audit engagements and firm-wide procedures.  This would include detailed root-cause analysis of the factors contributing to the factors leading to the issues identified during the audit quality inspections.  The annual report indicates that these actions plans and the related analyses should be subject to follow-up inspections.
  • Requiring firms to undertake remedial action to address certain deficiencies identified during the inspections where these are deemed to be particularly significant or may call into question the appropriateness of the financial statements or the audit opinion.
  • Performing thematic inspections such as those of performed in 2014/15 on the audit of loan loss provisioning and related IT controls in banks and building societies and the auditor’s consideration of the quality of financial reporting in smaller listed and AIM companies.  In 2015/16 the FRC propose to undertake thematic inspections of audit sampling, the role of the engagement quality control reviewer (EQCR) and firms’ internal quality monitoring procedures.

In terms of the new extended auditor reporting requirements, the annual report indicates that “firms have responded positively” and the FRC were “generally satisfied that the extended audit reports appropriately reflected auditors’ work and judgements”.  There were only a “small number” of instances where the auditor’s description of the nature or extent of audit work performed was “inaccurate”.  Alongside the annual report, the FRC has also issued a ‘Practice Aid’ for Audit Committees to help them assess audit quality.

In the future, the FRC’s inspection activity will be focused to the audits of businesses in “potentially high audit risk industry sectors including those where complex supplier arrangements are likely to be prevalent and to audits where there has been a recent change in auditor”.  Such businesses will include food, drink and consumer goods manufacturers and retailers – priority sectors set out in the FRC Plan and Budget 2015/16.  The FRC will continue to monitor this area in subsequent inspections.

Alongside the Audit Quality Inspection Annual Report for 2014/15, the FRC has also published individual reports for the 'Big Four' accountancy firms in the UK; Deloitte LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP and a separate report for BDO LLP.

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FRC publishes practice aid to help audit committees assess audit quality

29 May, 2015

The Financial Reporting Council (FRC) has published a practice aid to assist audit committees in assessing the effectiveness of the external audit process, as required by the 2012 UK Corporate Governance Code. The practice aid has been developed based on feedback from audit committee members, investors, financial management and auditors.

The aid is divided into several sections, providing audit committee members with:

  • an overview of audit quality;
  • the sources of evidence that the committee might consider in making its assessment;
  • the key professional judgements made by the auditor and how these might be assessed; and
  • a discussion of other areas that the committee might consider when evaluating the quality of their auditor.

It identifies four key elements that need to be assessed in an evaluation of audit effectiveness.

  1. The auditor's use of professional judgement - this is the key element and is supported by the other three.
  2. The mindset and culture of the auditor.
  3. The skills, character and knowledge of the auditor.
  4. The quality control procedures that the auditor has in place.

The practice aid itself, as well as a summary leaflet, can be downloaded from the FRC's website, as can the FRC's press release on this subject.  Our Governance in brief newsletter providing further information on the Practice Aid is also available.

New Vice-Chair of IFRS Foundation Trustees

29 May, 2015

The IFRS Foundation has announced that the Monitoring Board has approved the appointment of Sheila Fraser as Vice-Chair of the Trustees. In addition, three other Trustees have been reappointed.

Ms Fraser replaces Harvey Goldschmid, who passed away in February this year, with immediate effect. Ms Fraser is serving her first three-year term as a Trustee ending 31 December 2015. She has been reappointed to serve a second term beginning 1 January 2016 together with three other Trustees who have also been reappointed: Abdulrahman Al-Humaid, Wiseman Nkuhlu and Joji Okada.

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FRC appoints new members to its Conduct Committee, Audit and Assurance Council and Monitoring Committee.

29 May, 2015

The Financial Reporting Council (FRC) has appointed new members to its Conduct Committee, Audit and Assurance Council and Monitoring Committee.

The new members are:

  • Peter Baxter, previously Chief Executive Officer & Chief Investment Officer of Old Mutual Asset Managers (UK) Ltd who joins the Conduct Committee;
  • Kari Hale, Audit Partner, Deloitte LLP who joins the Audit and Assurance Council; and
  • James Coyle, previously Group Financial Controller, Lloyds Banking Group who joins the Monitoring Committee.
The press release is available from the FRC's website.

IASB issues work plan update

29 May, 2015

Following its May meeting, the IASB has updated its work plan. The revised plan adds a new project on 'Changes in accounting policies and estimates', moves the Exposure Draft on 'Clarifications to IFRS 15' and the Draft Interpretation on 'Uncertainties in income taxes' back by one quarter, and introduces a new format for reporting on the progress in research projects.

Current status

The revised timetable for the major projects is now as follows:

Project Current status Next project step Expected timing
Conceptual Framework — Comprehensive IASB project Exposure draft*
Financial instruments — Macro hedge accounting Comment letter analysis Redeliberations Q2 2015
Insurance contracts Revised exposure draft Redeliberations Q2 2015
Leases Revised exposure draft Target IFRS Q4 2015
Disclosure initiative — Principles of disclosure Board discussion Target discussion paper Q4 2015
Disclosure initiative — Changes in accounting policies and estimates Board discussion ED Q4 2015*
Disclosure initiative — Materiality Board discussion Draft Practice Statement Q3 2015
Rate-regulated activities Discussion paper Board discussion Q2 2015

* Indicates a change since the previous work plan update on 5 May 2015.

Updates regarding the implementation and research projects include:

  • The target Exposure Draft on clarifications to IFRS 15 is now expected in the third quarter of 2015 (was second quarter).
  • The Draft Interpretation on uncertainties in income taxes is now expected in the third quarter of 2015 (was second quarter).
  • The research projects have been reordered in the following categories:
    • Development phase
    • Assessment phase
    • Exploratory phase
    • PIR follow-up work
    • Completed work
    The PIR follow-up work contains two research projects that the IASB has identified as a consequence of the post-implementation review of IFRS 3 (Definition of a business and Goodwill); the next step in these projects has yet to be determined. Completed work contains two projects where the IASB has completed its initial assessment and has no current plans to undertake additional work (Foreign currency translation and High inflation). During reordering, the project on a standards-level review of disclosures (part of the Disclousre initiative) has gone missing from the work plan.

The revised IASB work plan is available on the IASB's Web site. We have updated our project pages to reflect the updated work plan and other known developments.

FRC and ICAEW to hold outreach event on the IASB’s Exposure Draft of a new Conceptual Framework for financial reporting

28 May, 2015

The Financial Reporting Council (FRC) and the Institute of Chartered Accountants in England and Wales (ICAEW) will be hosting a joint outreach event in September 2015 to discuss the International Accounting Standard Board’s (IASB’s) recently issued Exposure Draft (ED) of a new Conceptual Framework for financial reporting.

At the outreach event, the IASB will present its proposals and participants will have the opportunity to provide their views on the ED.

More information, including how to attend the outreach event can be found on the ICAEW website.

Financial Reporting Lab publishes report on investors’ views on digital communication used by companies in corporate reporting

28 May, 2015

The Financial Reporting Council's (FRC's) Financial Reporting Lab (“the Lab”) has today published a project report on investors’ views on digital communication used by companies in corporate reporting. The project report indicates that investors are open to digital forms of communication when it can sufficiently support their needs for corporate information.

The report forms part of the FRC’s ‘Clear and Concise’ initiative, launched in June 2014 and is the first phase in the Lab’s larger project Corporate reporting in a digital world launched in May 2014. 

It considers the views of investors on a range of digital communication mechanisms currently used by companies to report financial and non-financial information that would be typically found in the investor relations section of a company website.  The report focuses on the annual report as the Lab found that “the annual report remains of paramount importance to investors” and then explores other channels that companies use.

Eight companies, 15 institutional investors and five private retail investors were interviewed for the project.  Additional input was received from an online survey, the slides of which are available from the FRC website below.  The key findings were:

  • Most investors prefer PDF for digital annual reports and indicated that PDF provides the best mix of attributes of paper and digital. 
  • There were a number of attributes that investors valued in a PDF annual report such as the ‘search’ function that allows investors to quickly pinpoint areas of most interest to them. 
  • Investors feel that companies could be making better use of PDFs.  Some suggestions included:
    • Tailoring the PDF annual reports to look better on screen, for example use of landscape orientation or reducing use of columns.
    • Keeping the PDF simple.  The Lab found that interactive PDFs were not favoured by investors especially those private retail investors’.
    • Optimising the PDF for searching by using a single PDF for the annual report and ensuring terminology is consistent across sections of the report.
    • Providing an archive of PDFs over a sufficiently lengthy period with a 5 year period considered fundamental.

In terms of other communication channels that companies use to communicate information alongside the annual report (such as social media and apps) the report found that these other forms of communication are most useful when they provide new or additional information and do not replicate information provided by other channels.  Specifically, social media was not seen as a useful channel for company produced, investor-focused information and apps are not popular with investors.  A number of other investor observations on other forms of communication are provided in the full report.  To assist companies, investors who participated in this project suggest that companies (in relation to other communication channels and tools):

Reduce duplication and focus development towards tools and channels which provide new or additional information.

Acknowledge that investors follow more than one company by making tools and channels more consistent in scope and operation with other companies, making them easy to access and locate.

Make the purpose of each channel or tool clear to investors, and clarify its contents.

The Lab highlights that the report is not intended to form guidance and “companies should consider whether the steps identified by the Lab are suitable to their own circumstances”.  Following this report the Lab will use these findings to inform the next stage of its Corporate reporting in a digital world project - Digital Future.  This project will also consider areas that act as brakes on innovation.

Further findings are included within the full report which can be downloaded below.  Alongside the report, the Lab has also released a survey seeking views on digital reporting from those involved in the production and use of corporate reporting. The survey will be open until the end of June and can be accessed using the links below.

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IASB publishes Exposure Draft of a new Conceptual Framework

28 May, 2015

The International Accounting Standards Board (IASB) has published a comprehensive Exposure Draft (ED) containing proposals for topical areas where it considers a revision and amendment of the existing Conceptual Framework necessary. Included in the ED are proposals to revise the definitions of an asset and a liability, to introduce guidance on measurement and derecognition, and to set a framework for presentation and disclosure. The main ED is accompanied by an ED containing proposals regarding references to the Conceptual Framework in other IASB pronouncements. Comments on both EDs are due 26 October 2015.



The current Conceptual Framework has been left largely unchanged since its inception in 1989. In 2004, the IASB and the FASB decided to review and revise the conceptual framework, however, changed priorities and the slow progress in the project led to the project being abandoned in 2010 after only Phase A of the original joint project had been finalised and introduced into the existing framework as Chapters 1 and 3 in September 2010. Phase D saw the publication of a discussion paper and an exposure draft but was never finalised. The Boards discussed Phases B and C quite extensively without any consultation document ever being issued, and Phases E to H largely remained untouched.

During the 2011 agenda consultation many participants called for the IASB to reactivate and finalise the conceptual framework project given the multitude of open conceptual issues it is facing in many of its current projects. As a result, the IASB officially added the project to its agenda again in September 2012, this time as an IASB-only project and no longer aimed at a substantial revision of the framework but focused on those topics that are not yet covered (e.g. presentation and disclosure) or that show obvious shortcomings that need to be dealt with. As a first step, a Discussion Paper covering all aspects of the framework project was published in July 2013, followed now by two EDs - one covering the Conceptual Framework itself, one covering references to the Conceptual Framework in other IASB pronouncements.


Summary of main proposals

ED/2015/3 Conceptual Framework for Financial Reporting sets out the revised Conceptual Framework structured into an introduction, eight chapters, and two appendices:

Chapter Topic
1 The objective of general purpose financial reporting
2 Qualitative characteristics of useful financial information
3 Financial statements and the reporting entity
4 The elements of financial statements
5 Recognition and derecognition
6 Measurement
7 Presentation and disclosure
8 Concepts of capital and capital maintenance
Appendix A Cash-flow-based measurement techniques
Appendix B Glossary

The key proposals in each chapter are summarised below:

Introduction. The first section offers background information. It also describes the purpose of the conceptual framework and its status within the hierarchy of IASB pronouncements. The ED explains that the Conceptual Framework's primary purpose is to assist the IASB in developing and revising IFRSs (even though it may be useful to parties other than the IASB) and that the framework does not override any specific IFRS. Should the IASB decide to issue a new or revised pronouncement that is in conflict with the framework, the IASB will highlight the fact and explain the reasons for the departure going forward.

Chapter 1 - The objective of general purpose financial reporting. This is the first of the two chapters that were finalised as part of the joint project with the FASB in 2010, so there are only limited changes. In essence, the IASB's proposals in this chapter aim at giving prominence to the importance of providing information that is needed to assess management's stewardship of the entity's resources.

Chapter 2 - Qualitative characteristics of useful financial information. This is the second of the two chapters that were finalised as part of the joint project with the FASB in 2010 (published as Chapter 3 in the 2010 Conceptual Framework). Again, proposed changes are limited. However, the IASB proposes to reintroduce an explicit reference to the notion of prudence and states that the exercise of prudence supports neutrality. Prudence is defined as the exercise of caution when making judgements under conditions of uncertainty. The chapter also contains a proposed addition that would clarify that faithful representation means representation of the substance of an economic phenomenon instead of representation of its legal form only.

Chapter 3 - Financial Statements and the reporting entity.The ED states the objective of financial statements (to provide information about an entity's assets, liabilities, equity, income and expenses that is useful to financial statements users in assessing the prospects for future net cash inflows to the entity and in assessing management's stewardship of the entity's resources) and sets out the going concern assumption. Interestingly, the ED only mentions two statements explicitly: the statement of financial position and the statement(s) of financial performance (the latter being the former statement of comprehensive income); the statement of cash flows and the statement of changes in equity go unmentioned. The chapter also discusses the definition of a reporting entity and the boundary of a reporting entity. It also states the IASB's conviction that, generally, consolidated financial statements are more likely to provide useful information to users of financial statements than unconsolidated financial statements.

Chapter 4 - The elements of financial statements. The main focus of this chapter is on the definitions of assets, liabilities, and equity as well as income and expenses. The definitions are quoted below:
Asset. An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
Liability. A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
Equity. Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Income. Income is increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims.
Expenses. Expenses are decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims.
Note that, other than in the DP, the IASB has backed away from changes in the definitions liabilities and equity that would address the problems that arise in classifying instruments with characteristics of both liabilities and equity. Exploring those problems has been transferred to the IASB's research project on financial instruments with the characteristics of equity.

Chapter 5 - Recognition and derecognition. The ED states that only items that meet the definition of an asset, a liability or equity are recognised in the statement of financial position and only items that meet the definition of income or expenses are to be recognised in the statement(s) of financial performance. However, their recognition depends on three criteria: their recognition provides users of financial statements with (1) relevant information about the asset or the liability and about any income, expenses or changes in equity, (2) a faithful representation of the asset or the liability and of any income, expenses or changes in equity, and (3) information that results in benefits exceeding the cost of providing that information. Nevertheless, the ED also maintains that whether the information provided is useful to users depends on the item and the specific facts and circumstances and requires judgement and possibly varying recognition requirements between standards. Derecognition requirements as presented in the ED are driven by two aims: the assets and liabilities retained after the transaction or other event that led to derecognition must be presented faithfully and the change in the entity's assets and liabilities as a result of that transaction or other event must also be presented faithfully. The ED also describes alternatives when it is not possible to achieve both aims.

Chapter 6 - Measurement. This chapter is dedicated to the description of different measurement bases (historical cost and current value (fair value and value in use/fulfilment value), the information that they provide and their advantages and disadvantages. A table offers an overview of the information provided by various measurement bases. The ED also sets out factors to consider when selecting a measurement basis (relevance, faithful representation, enhancing qualitative characteristics, and factors specific to initial measurement) and points out that consideration of the objective of financial reporting, the qualitative characteristics of useful financial information and the cost constraint are likely to result in the selection of different measurement bases for different assets, liabilities and items of income and expense. Appendix A of the ED supplements Chapter 6 and describes cash-flow-based measurement techniques for cases when a measure determined using a measurement basis cannot be observed.

Chapter 7 - Presentation and disclosure. In this chapter, the ED discusses concepts that determine what information is included in the financial statements and how that information should be presented and disclosed. The statement of statement of comprehensive income is newly described as "statement of financial performance", however, the ED does not specify whether this statement should consist of a single statement or two statements, it only requires that a total or subtotal for profit or loss must be provided. Notably, the ED does not define profit or loss, thus the question of what goes into profit or loss or into other comprehensive income is still unanswered.

Chapter 8 - Concepts of capital and capital maintenance. The proposals in this chapter were taken over from the existing Conceptual Framework with minor changes for consistency of terminology. The IASB states that it would consider revising the description and discussion of capital maintenance if it were to carry out a future project on accounting for high inflation. However, it also states that no such work is currently planned.

ED/2015/4 Updating References to the Conceptual Framework contains proposed amendments to IFRS 2, IFRS 3, IFRS 4, IFRS 6, IAS 1, IAS 8, IAS 34, SIC-27 and SIC-32 in order to update those pronouncements with regard to references to and quotes from the framework so that they refer to the revised Conceptual Framework. As the Conceptual Framework will mainly affect the IASB and its work while the proposals regarding the other pronouncements could also affect preparers, the IASB considers granting a transition period of approximately 18 months for the amendments proposed in ED/2015/4 in order to give preparers time to identify, understand and adjust to possible implications.


Comment deadline and next steps

The IASB allows constituents an extended six months period to work their way through the document and to respond to the questions raised; hence, comment letters are to be submitted by 26 October 2015. The IASB will consider the comments received when developing the final version of the revised Conceptual Framework. The IASB aims to finalise the revised Conceptual Framework in 2016.

Note: On 22 September 2015, the IASB decided to extend the comment letter deadline to 25 November 2015.

Additional information

On 17 June 2015, the IASB will give a live web presentation introducing the Exposure Draft and offering the public an opportunity to ask questions. More information on the webinar is available on the IASB website.


Seven lessons learned from the IFRS adoption in the EU

28 May, 2015

The Institute of Chartered Accountants in England and Wales (ICAEW) has published a report setting out some practical insights and recommendations for policy makers, regulators, standard-setters and other interested parties in jurisdictions that have recently adopted IFRS or are considering doing so.

The insights were gleaned while preparing the ICAEW's response to the European Commission's public consultation on the impact of International Financial Reporting Standards (IFRSs) in the EU, which built on a consultation among ICAEW members and was supplemented by a report reviewing 170 academic research papers (the report has recently been updated).

As the results of the ICAEW's consultation and review exercises indicated among other things that lessons might be learned by jurisdictions outside Europe contemplating or in the early stages of IFRS adoption from the experience of the UK and other EU member states, the lessons have now been published in a succinct and accessible report that places them in a global context.

The lessons are:

  • The benefits of IFRS outweigh the costs as in a relatively short time there were improvements in transparency, comparability, cost of capital and market liquidity.
  • Companies listed on regulated markets should be required to use IFRS as the report finds that the EU's decision not to extend the use of IFRS to listed entities that are not groups and other public interest entities is "questionable".
  • Local variants of IFRS should be kept to a minimum as the full benefits of IFRS can only be reaped if the standards are adopted in full.
  • Sometimes complexity is unavoidable as a complex world and complex business transactions can necessitate complex accounting.
  • National standard-setters and regional groupings are important as they have a central role to play in undertaking coordinated research, field testing and outreach activities.
  • Strong national enforcement is critical and experience in Europe has also demonstrated the vital importance of mechanisms for sharing and co-ordinating enforcement decisions.
  • Endorsement underpins legitimacy and has proved a critical means of establishing the political legitimacy of IFRS in Europe.

The lessons presented in the report a supplementd by three appendices: The future of IFRS – perspectives and progress; IFRS and the global financial crisis; and US GAAP – looking ahead.

Please click to access the report on the ICAEW website - this page offers you access to a short video introducing the report, the full report itself and executive summaries of the lessons.

The ICAEW will be holding a webinar to discuss the key findings of the report on 8 July 2015.  Registration details are available on the ICAEW website.

May 2015 IASB meeting notes posted — part 1

27 May, 2015

The IASB met at its offices in London on 18–20 May 2015. We have posted the Deloitte observer notes from the sessions on insurance contracts.

Click through for direct access to the notes:

Wednesday, 20 May 2015

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

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