FRC consults on package of measures to implement the EU Audit Regulation and Directive

30 Sep, 2015

The Financial Reporting Council (FRC) has issued a consultation on changes to Ethical Standards for Auditors, International Standards on Auditing (ISAs), the UK Corporate Governance Code and the Guidance on Audit Committees arising from the UK implementation of the EU Audit Regulation and Directive. Proposed changes to the latter two pronouncements also implement parts of the Competition & Markets Authority’s (CMA) final Order, providing audit committees with one place to look for guidance on the process to manage the relationship with their external auditor.

Entities affected

By far the most significant changes are for Public Interest Entities (PIEs).  The FRC has, however, taken the opportunity to consider whether some of the changes should be extended to entities where there is significant public interest on the grounds that they are listed on markets outside the European Economic Area (EEA) or unregulated markets within the EEA. Previously, the FRC only applied their “listed” definition in ethical standards to entities with securities traded on a UK or Irish market:

  • The list of newly banned services for the audits of PIEs will not apply to such entities; nor will the 70% cap.
  • Existing FRC “listed” restrictions will apply to such companies, but these will be relaxed for non-PIEs (e.g. Alternative Investment Market (AIM) companies) where:
    • the listing is a “technical listing” (e.g. where debt is listed on a market but is held by another group company, so it is unlikely or impossible to fall into public hands – typical in many private equity backed companies); or
    • the average market capitalisation is below £100m. The FRC expects that around three quarters of AIM companies will fall into this category.

Provision of non-audit services

The FRC has adopted the EU list of banned non-audit services which cannot be provided to PIEs.  The proposed list of newly prohibited services for PIEs includes certain tax services (including preparation of tax forms and provision of tax advice), services that involve playing any part in the management or decision-making of the audited entity, payroll and bookkeeping services, valuation services and certain legal services.  The FRC proposes that some of these services will be allowed to be performed in certain situations but in those cases will require explanation from the auditor that the principles of independence have been applied and that the auditor has not placed significant reliance on these services as part of their audit.    

In group situations network firms (whether involved in the audit or not) cannot provide prohibited services to EEA PIE audit clients of the firm, nor their EEA parents or subsidiaries

The 70% cap

The EU audit regulation (link to Europa website) contains a 70% cap on non-audit fees to PIEs.

In implementing the cap in the UK the FRC has:

  • decided not to reduce the percentage level of the cap – it remains at 70%;
  • removed the anomaly whereby if no non-audit services are provided in a year, the clock starts again and the cap will not apply until four more years have passed;  and
  • clarified what is meant by services required by EU or member state law or by a rule issued by a regulator in accordance with powers granted by legislation.

Proposed changes to the UK Corporate Governance Code ("the Code")

The FRC is proposing the following changes to section C.3 (Audit Committee and Auditors) of the UK Corporate Governance Code:

  • The requirement for an audit committee member to have “recent and relevant financial experience” is changed to a need for “competence in accounting and/or auditing”. More fundamentally, the audit committee as a whole will need competence relevant to the sector in which the company operates. This may affect the composition of some audit committees.
  • The FTSE 350 audit tendering provision will be removed as this is superseded by the CMA and EU requirement for mandatory tendering and rotation of the audit firm.
  • The audit committee section of the annual report will need to provide advance notice of tendering plans. The Department for Business, Innovation and Skills (BIS) are expected to provide more details in this area.

The FRC is not proposing to take forward the CMA recommendation that there should be an advisory vote on the audit committee’s report, as they believe that shareholders can express views by refusing to re-elect members of the audit committee or table a specific resolution with concerns. They are, however, asking for views.

Proposed changes to the Guidance on Audit Committees

The FRC is also proposing a number of changes to the Guidance on Audit Committees. In addition to changes to bring the Guidance in line with the proposed changes to the Code, the following amendments have been made: 

  • An acknowledgement that the remuneration of audit committees (and particularly audit committee chairmen) should reflect the significant responsibility they bear and that a significant extra amount of time needs to be committed.
  • A recommendation that the audit committee should consider key matters of their own initiative rather than relying solely on the work of the external auditor. The audit committee must decide whether the sources of assurance and information it is being offered are sufficient and objective.
  • There is clarification that the board has ultimate responsibility for an organisation’s risk management and internal control systems, but that the audit committee may play a role in assisting the board to fulfil this function. The audit committee should consider what role it can play and what information it requires to assist in putting in place sound risk management and internal control systems.
  • The section on the internal audit process has been updated to reflect existing best practice in this area of the audit committee’s activities. A key part of this is ensuring that the internal auditor has direct access to the board chairman and the audit committee and is accountable to the audit committee.
  • Reflecting the recommendations in the CMA Final Order, the external audit process section has been amended to make it clear that the audit committee should have primary responsibility for negotiating the fee and scope of the audit, initiating a tender process, influencing the appointment of an engagement partner and making formal recommendations to the board on the appointment, reappointment and removal of the external auditors.
  • On the provision of non-audit services, the audit committee is asked to set and apply a formal policy specifying the types of non-audit service for which use of the external auditor is pre-approved but that such approval should only be in place for matters that are clearly trivial.
  • More emphasis is placed on the audit committee’s interactions with the external auditor around the areas of significant judgement and risks to audit quality. 

In addition to these changes in the audit committees recommended activities, there are also a number of additions to the suggested content of the audit committee section of the annual report including the current audit partner’s name and for how long the partner has held the role and, the committee’s policy for approval of non-audit services and the nature and extent of interaction (if any) with the FRC’s Corporate Reporting Review team. 

Other proposed changes to the Ethical and Auditing Standards

Incorporating the changes to non-audit services described above, the FRC is planning that the existing Ethical Standards for Auditors will be rewritten into one FRC Ethical Standard (plus another for smaller entities). This will bring in the EU reforms as well as some areas where the FRC had fallen behind the Code set by the International Ethics Standards Board for Accountants

There are also a number of proposed amendments to auditing standards to deal with the EU reforms and International Auditing and Assurance Standards Board (IAASB) changes in respect of auditor reporting and disclosures.  Key changes include:

  • The UK has led the way with “enhanced auditor reporting” for companies reporting on their compliance with the Code. This will be extended as a matter of EU law to all PIEs, which will be a change for many companies with only listed debt and unlisted banks, building societies and insurers. It will also be extended to entities listed anywhere in the world, whether on a regulated or unregulated market, as part of the IAASB's auditor reporting project. This will require some changes to existing enhanced auditor reports.
  • For those entities to which the enhanced audit report applies,  listed company style audit committee communications will be required.
  • Reporting positively on the appropriateness of going concern and lack of material uncertainties in the enhanced auditors’ report will be required.
  • A handful of changes to requirements and many changes to application material in a large number of ISAs will be made as part of the IAASB’s disclosure project to clarify that the audit of disclosures is on an equal footing with the audit of the primary statements. This will complement work by the IASB on disclosures for preparers of financial statements.

The effective date for the EU changes can be no later than periods commencing on or after 17 June 2016; at present, the FRC have not provided a firm effective date. They have also not yet clarified what, if any, transitional provisions might be available.

The consultation does not cover other topics, including regulation of the audit profession and rotation and tendering of auditors, which are the key topics for a separate BIS consultation paper due in October.

Comments are requested until 11 December 2015.

The FRC will be holding a meeting to discuss the proposals in the consultation on 2 November 2015.  Details on how to register for the meeting can be found on the FRC website.

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FASB proposes clarifications to its new revenue standard

30 Sep, 2015

The US Financial Accounting Standards Board (FASB) has issued a proposed ASU, 'Narrow-Scope Improvements and Practical Expedients', that would amend certain aspects of the Board’s May 2014 revenue standard, ASU 2014-09, 'Revenue From Contracts With Customers'.

The amendments, which are being proposed in response to feedback received by the FASB–IASB joint revenue recognition transition resource group (TRG), include the following:

  • Collectibility and contract termination.
  • Presentation of sales tax collected from customers.
  • Noncash consideration.
  • Contract modifications at transition.
  • Completed contracts at transition.
  • Transition technical correction.

The proposed ASU’s effective date and transition provisions would be aligned with the requirements of ASU 2014-09, which, once finalised, will be deferred by one year.

Comments on the proposed ASU are due by 16 November 2015.

In July 2015, the IASB also issued an ED proposing clarifications to its new revenue standard, IFRS 15 Revenue from Contracts with Customers. The FASB’s proposed ASU states:

The amendments in this proposed Update are not identical to those proposed by the IASB, and some are incremental to the amendments proposed by the IASB. The FASB expects that the amendments in this proposed Update would not result in financial reporting outcomes that are significantly different from those reported under IFRS for similar transactions.

For more information, see the press release and proposed ASU on the FASB’s website.

Conduct Committee findings in relation to accounting under IAS 18

30 Sep, 2015

The Financial Reporting Council (FRC) has issued a press release of the findings of its Conduct Committee stemming from the review of the annual reports and accounts of blur Group plc ("the company").

The principal issues included:

  • whether the company was principal or agent in relation to the outsourcing services it provided;
  • whether revenue was recognised only when there was sufficient evidence to conclude that the stage of completion could be assessed reliably and when it was probable that economic benefits would be received in accordance with IAS 18 Revenue; and
  • whether the strategic report gave a fair and balanced analysis of the company’s performance.

The Conduct Committee press release serves as a reminder that revenue recognition is a continued area of focus for the Conduct Committee and it can present a number of challenges for companies to consider.  It also highlights that entities should review arrangements carefully to determine whether they are principal or agent as this can significantly affect both the amount of revenue to be recognised and, potentially, when that revenue should be recognised. 

Please click here for the full press release on the FRC’s website.

EC's Capital Markets Union action plan includes consultation with the IASB on a tailor-made accounting solution for European SMEs

30 Sep, 2015

The European Commission (EC) has adopted an action plan setting out 20 key measures to achieve a true single market for capital in Europe. The project aims to boost growth in the EU with the creation of a single market for capital and break down the barriers that are blocking cross-border investments in the EU and preventing businesses from getting access to finance.

As part of the overall project, the EC launched a public consultation in February 2015. One of the questions in the consultation paper had been whether there is value in developing a common EU level accounting standard for small and medium-sized entities (SMEs). The feedback statement on the consultation released together with the action plan reveals that while some respondents considered that the current situation is appropriate and should not be changed, most respondents considered that some kind of initiative or incentive, legislative or other, is needed to render EU SMEs more attractive to European and international investors through enhanced transparency and comparability of relevant financial information. Rather than a full application of the IFRS or use of the IFRS for SMEs, many respondents suggested that a pragmatic IFRS-based solution be found in order to deliver for SMEs the advantages of a high-quality, comparable, international set of accounting rules, whilst avoiding excessive administrative burden and costs, particularly in relation to disclosure.

Accordingly, the action plan states:

The Commission will also explore with the International Accounting Standards Board (IASB) the possibility of developing a voluntary tailor-made accounting solution, which could be used for companies admitted to trading on SME Growth Markets.

The action plan was published together with a wealth of additional information on the EC's website. Please click to access:

IIRC appoints new Board

30 Sep, 2015

The International Integrated Reporting Council (IIRC) has appointed a new Board of Directors.

The appointment of the IIRC’s new 12-strong Board, which will take effect from 1 October 2015, follows the introduction of a new constitution for the organisation. Please click to acces the press release offering a list of new board members on the IIRC website.

EFRAG, EFFAS, AIAF, and IASB joint investor outreach - change of agenda

30 Sep, 2015

The European Financial Reporting Advisory Group (EFRAG), the European Federation of Financial Analysts Societies (EFFAS), the Associazione Italiana degli Analisti e Consulenti Finanziari (AIAF), and the International Accounting Standards Board (IASB) offer a joint outreach event that will be held on 22 October 2015 in Milan.

The event will have a dual focus. Originally, this was to be profit or loss and the role of other comprehensive income and insurance industry accounting. Insurance was was now replaced by a discussion of IFRS 9. A panel of experts will report on their first experience and impressions in connection with the new standard. The event will be held in English. Please click for updated information on the event on the EFRAG website.

FRC issues revised versions of FRS 100, FRS 101 and FRS 102

29 Sep, 2015

The Financial Reporting Council (FRC) has today issued revised editions of FRS 100, FRS 101 and FRS 102, incorporating recently published amendments; most notably the incorporation of amendments issued in July 2015.

The amended version of FRS 100 Application of Financial Reporting Requirements updates the version issued in November 2012 for the following:

  • the withdrawal of FRS 27 Life Assurance (as set out in FRS 103 Insurance Contracts issued in March 2014);
  • consequential amendments to FRS 102 included in FRS 104 Interim Financial Reporting issued in March 2015;
  • Amendments to FRS 100 issued in July 2015;
  • an editorial amendment to paragraph A2.19 to include a reference to the Strategic Report; and
  • some minor typographical or presentational corrections. 

The amended version of FRS 101 Reduced Disclosure Framework updates the version issued in August 2014 for the following:

  • Amendments to FRS 101 Reduced Disclosure Framework – 2014/15 cycle and other minor amendments issued in July 2015; and
  • some minor typographical or presentational corrections. 

The amended version of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland updates the version issued in August 2014 for the following:

  • an editorial amendment to Section 12 Other Financial Instruments Issues in relation to the examples of hedge accounting issued on 17 September 2014;
  • Amendments to FRS 102 – Pension obligations issued in February 2015;
  • consequential amendments to FRS 102 included in FRS 104 Interim Financial Reporting issued in March 2015;
  • Amendments to FRS 102 – Small entities and other minor amendments issued in July 2015; and
  • some minor typographical or presentational corrections.

The revised versions of the standards are available on the FRC website.

Michel Prada opens the autumn 2015 IFASS meeting

29 Sep, 2015

Directly after the 2015 Word Standard-setters (WSS) meeting, the national standard-setters convened at the autumn 2015 International Forum of Accounting Standard Setters (IFASS) meeting, also held in London. Michel Prada, Chairman of the Trustees of the IFRS Foundation, delivered the opening remarks.

Mr Prada first briefly spoke on the main strategic challenges, including the status of global progress towards IFRS. He stressed that the increasing adoption of IFRSs around the world also showed that IFRS raise the quality and consistency of financial reporting and bring benefits to companies and investors and that jurisdictions are aware of that. Mr Prada also mentioned that the fact that IFRS has been adopted by so many jurisdictions around the world means that the IFRS Foundation can shift the focus from getting jurisdictions to adopt to allocating more time to supporting the needs of existing IFRS jurisdictions, as well as supporting those jurisdictions who have already made substantial progress towards the use of IFRS for domestic purposes, such as Japan, India and China. He added that this does not mean that the IFRS Foundation will ignore other jurisdictions, such as the United States, that have not yet adopted IFRSs. He expressed hopes that convergence will continue.

Secondly, Mr Prada spoke on the current consultation on the structure and effectiveness of the IFRS Foundation. He reminded the standard-setters in the room that this review provides a platform for them to tell the IFRS Foundation what it does well and where there is room for improvement. He encouraged feedback on how the IFRS Foundation can ensure that the relevance of IFRS is maintained, what more can be done to encourage consistency in the application of IFRS, and what more can the IFRS Foundation do to further strengthen the governance, accountability and financing of the IFRS Foundation.

Finally, given the audience he was addressing, Mr Prada discussed the role and responsibilities of accounting standard-setters in an IFRS world. He pointed at the IASB's WSS meeting just held before the IFASS meeting and the ASAF meeting that will directly follow. He asked whether having these bodies in place was sufficient. Mr Prada also asked whether the IASB should get more involved in bodies such as IFASS, which is a body instituted by the national standard-setters where the IASB is just one guest among many, or whether it is good that national-standard-setters have a body to themselves. Mr Prada also mentioned that expectations with all bodies and the IFRS Foundation and the IASB always go two ways and that in a world where all involved parties agree that the goal is having one set of high quality global accounting standards they have to leverage resources and networks, particularly in the area of policy-level outreach and stakeholder engagement.

After his remarks Mr Prada took questions from the audience on all aspects of his speech. One of them concerned the perceived fact that the IASB favours coopoeration with the FASB over working with other standard-setters, which would be giving undue influence to the FASB. In his reply, Mr Prada again spoke out fervently for supporting the goal of global accounting standards. He stated that if a standard-setter has knowledge the IASB can draw on, the IASB should not turn it down - and the FASB was a very experienced standard-setter. Yet he also pointed at the fact that the IASB works with many other standard-setters on individual projects. Mr Prada also denied that this cooperation means that the IASB is unduly influenced by these standard-setters. For, as he pointed out, if the FASB really influenced the IASB unduly, IFRSs would be much more rule based while in fact there are now FASB standards (for example on revenue recognition) that are in fact principles based.

Please click to access the full text of the speech on the IASB website.

ESMA works on implementing EU-Transparency Directive requirements

29 Sep, 2015

The European Securities and Markets Authority (ESMA) has taken steps to implement requirements that were included in the amended European Transparency Directive. The requirements aim at making submission easier for issuers and facilitating accessibility, analysis and comparability for investors and regulators.

One of the requirements of the amended Directive is that issuers listed on regulated markets in the EU must prepare their annual financial reports in a European Single Electronic Format (ESEF) from 1 January 2020. ESMA has now launched a public consultation on regulatory technical standards on the ESEF. The consultation documents are available through the press release on the ESMA website. Comments are requested by 24 December 2015.

The other requirement ESMA is currently working on is a European Electronic Access Point (EEAP). The objective of the EEAP is to provide an easy search and access tool for end-users looking for regulated information, such as annual reports, major shareholdings etc., on issuers admitted to trading on regulated markets in Europe. ESMA has now submitted corresponding regulatory technical standards to the European Commission for endorsement. It is expected that the EEAP will be made available to end-users after 1 January 2018. Please see the final report on the ESMA website for more information.

EFRAG extends comment period for its publication documents on the Conceptual Framework ED

29 Sep, 2015

Following the IASB's decision to extend the comment period for the Conceptual Framework ED, the European Financial Reporting Advisory Group (EFRAG) has followed suit and has extended the comment period for the three related documents it currently has out for public consultation.

On 22 September 2015, the IASB followed an earlier staff recommendation and extended the comment period on the May 2015 exposure drafts to 25 November 2015. EFRAG had been among the voices calling for an extension of the comment period. EFRAG has now extended the comment period on its own related consultation documents to 18 November 2015:

Please click to access the press release announcing the extension on the EFRAG website.

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