On 12 November 2015, a joint outreach event will occur in Paris and will be co-hosted by the French standard-setter ANC in Paris. The event, which will be in French, will feature IASB member Philippe Danjou as a speaker, and is titled "What should EFRAG, the ANC and the IASB focus on before 2020?" Please click for more information in the press release on the EFRAG website. Registration for the event is available through the ANC.

The next joint outreach event will occur on 23 November 2015 in Brussels. The event, which will be in English, will feature IASB Senior Technical Manager April Pitman and EFRAG TEG Chairman Francoise Flores. For more information, including how to register, see the press release on the EFRAG website.

Under the Companies Act 2006 ("the Act"), the Conduct Committee of the FRC reviews the directors’ reports and accounts of public and large private companies to determine whether they comply with the Act and other reporting requirements. Where it appears that those requirements have not been complied with, the Conduct Committee investigates the position and determines the action to be taken to address any non-compliance.

The Conduct Committee reviewed the reports and accounts of 252 companies.  Following the initial review, 76 companies were asked to provide further information and explanations. 

The key messages from the report are:

• There was a “good level of corporate reporting” by larger public companies, particularly the FTSE 350. 
• Boards “generally responded well” to the strategic reporting requirements.
• There was some examples of “good reporting” by smaller listed and AIM quoted companies.  However, there were also instances of “straightforward errors” in the application of IFRSs by them.  It was also found that “inadequate” explanations of their results and also descriptions of principal risks in their strategic reports was also “more likely” from the Boards of smaller companies.  The FRC will continue to focus on the quality of reporting by smaller listed and AIM quoted companies and in June issued a consultation paper to support a step change in how they report.
• Boards should not use materiality assessments to “conceal errors or achieve a particular presentation”.
• Boards need to “explain judgements around pension assets or excess deficit funding liabilities” and “disclose the amount of deficit funding obligations”.

The report identifies ten areas of corporate reporting that were most frequently raised with companies:

• Strategic reports.  The Conduct Committee challenged companies where undue prominence given to alternative performance measures meant that the review was not sufficiently balanced.  The Conduct Committee encouraged Boards to focus on disclosures that are relevant to investors and not include extra unnecessary information in line with the FRC’s Clear and Concise initiative.  Additionally the Conduct Committee challenged companies where unusual or non-recurring items were inadequately explained and questioned the disclosure of key performance indicators where these could not be reconciled to the relevant amounts or where trends were not explained.  It was found that there was “poorer quality” reporting in this area by private, small listed and AIM-quoted companies.
• Accounting policies.  The Conduct Committee “reminded companies of the requirement to include accounting policies for all material transactions, particularly where they were unusual or non-recurring”.  Challenge was also raised where companies had general accounting policies “but it appeared that they should have had more specific policies for certain significant transactions”. 
• Critical judgements.   The Conduct Committee wrote to companies where there was an opportunity to match narrative of critical judgements in the accounts with those disclosed in Audit Committee reports.
• Clear and Concise reporting.  The Conduct Committee challenged companies that included “irrelevant material” in their reports and accounts.  The Conduct Committee comments that “while an increasing number of companies have initiated Clear and Concise reviews, we continue to see reports and accounts that would benefit from this approach”.
• Business combinations.  A specific area of focus was whether companies had identified all separate intangible assets arising from business combinations.  The Conduct Committee “looked for consistency between discussions in a company’s press notices and strategic report and the intangible assets identified in the company’s accounts”.
• Exceptional and similar items.  The Conduct Committee monitored companies’ presentation of exceptional and similar items and considered how companies had reflected principles set out in its December 2013 press notice.
• Revenue.  The Conduct Committee challenged boilerplate accounting policy disclosures and those that were “insufficiently tailored to all material revenue streams implied by the company’s business model”.  A key challenge was how Boards had estimated the stage of completion of long-term contracts.
• Pensions.  The Conduct Committee wrote to companies that did not provide sufficient disclosures under IAS 19 Employee Benefits within their accounts.  Companies were also reminded that they should “give sensitivity analyses for all significant actuarial assumptions”.
• Taxation.  The Conduct Committee raised questions where it could not understand the nature or amounts of reconciling items between a company’s notional and effective tax rate.  The Conduct Committee also focused on explanations supporting the recognition of deferred tax assets.
• Cash flow statements.  The Conduct Committee “continued to challenge companies on their classification of cash flows as operating, financing or investing”.  

Additionally, the report highlights that in 2015/16 the Conduct Committee will consider:

• the effect on asset valuations of volatility in commodity prices and in equity and bond markets; and
• disclosures of tax risks, accounting policies, judgements and estimates following increased uncertainties due to challenges by global and European institutions and governments. 

Alongside the Corporate Reporting Review Annual Report 2015, the FRC has also published a slide deck of technical findings (see link below) from the Conduct Committee's Financial Reporting Review Panel during the year, which gives more detail on the areas challenged by the Panel. 

Click for (all links to FRC website):

•  Press release
• Corporate Reporting Review: Annual Report 2015
• Technical findings of the Conduct Committee’s Financial Reporting Review Panel: 2014-15
• Our Governance in brief publication on the Corporate Reporting Review Annual Report 2015

The article assesses the impact of the programme on both the IASB and the investors involved. Please click to access the article and a press release on the four new joiners to the programme on the IASB website.

Background

The IFRS Interpretations Committee observed diversity in practice regarding the recognition and measurement of current tax, deferred tax liabilities and deferred tax assets as defined by paragraph 5 of IAS 12 Income Taxes, when there are uncertainties in the amount of income tax payable (recoverable). As a consequence, the Interpretations Committee decided to develop an interpretation.

Proposed guidance

Scope

The draft proposes that the interpretation be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12.

Issues

Whether tax treatments should be considered collectively

An entity is required to use judgement to determine whether each tax treatment should be considered independently or whether some tax treatments should be considered together. The decision should be based on which approach provides better predictions of the resolution of the uncertainty.

Assumptions for taxation authorities' examinations

An entity is to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so.

Determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates

An entity has to consider whether it is probable that the relevant authority will accept each tax treatment, or group of tax treatments, that it used or plans to use in its income tax filing.

• If the entity concludes that it is probable that a particular tax treatment is accepted, the entity has to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment included in its income tax filings.
• If the entity concludes that it is not probable that a particular tax treatment is accepted, the entity has to use the most likely amount or the expected value of the tax treatment when determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. The decision should be based on which method provides better predictions of the resolution of the uncertainty.

Effect of changes in facts and circumstances

An entity has to reassess its judgements and estimates if facts and circumstances change.

Disclosures

The draft interpretation does not contain any new disclosure requirements. Instead it highlights existing disclosure requirements in IAS 1, IAS 12 and IAS 37.

Transition

An entity has to apply the requirements by recognising the cumulative effect of initially applying them in retained earnings, or in other appropriate components of equity, at the start of the reporting period in which an entity first applies them, without adjusting comparative information. Full retrospective application is permitted, if an entity can do so without using hindsight.

Comment deadline and additional information

Comments on DI/2015/1 Uncertainty over Income Tax Treatments are requested by 19 January 2016. Please click for:

• IASB press release (link to IASB website)
• Access to the draft interpretation on the IASB website
• Our UK Accounting Plus project page on accounting for uncertainties in income taxes
• Our Need to know publication on the draft interpretation

In addition to an urgent assessment of the evolving regulatory environment, IFAC’s recommendations include that the G20 promote development and adoption of clear principles for high quality regulation, which, for financial information and financial reporting, includes globally consistent and effective regulation based on the global adoption and implementation of high-quality standards. Therefore, Recommendation 4 in the IFAC's letter reads:

Please click to access the full letter and a corresponding press release on the IFAC website.

When reviewing progress in the world of corporate reporting it is easy to underestimate the scale of what has happened over the last few years. A recent seminar at the Deloitte Academy brought this to the fore. The springboard for the discussions was the latest Deloitte survey of the state of UK annual reports. This is the twentieth such annual survey and it talks of significant change. The seminar highlighted its findings and opened up the discussion. Sallie Pilot, director of strategy and research at consultants Black Sun, talked of quite how far we had come. ‘Ten years ago’, she said, ‘issues like strategy or the business model were rarely talked about’. And it is true. The whole approach to reporting has changed. In those days people didn’t talk about the whole business. They talked about its different parts. Now there is a framework, from strategic reports and business models to integrated reporting, which brings people together across the business.

Integrated reporting, as Veronica Poole, UK national head of accounting and corporate reporting with Deloitte, was keen to point out, is really about the integrated thinking that the concept of integrated reporting brings about. Suddenly we are all talking in terms of transparent reporting which didn’t exist just a few short years ago. And people are talking in much clearer terms. Melanie McLaren, executive director, codes and standards with the Financial Reporting Council, talked of how reporting requirements drive behaviour and how the focus of the FRC was now on communication rather than compliance. And she talked about the introduction by the FRC of the concept of the directors’ report having to be ‘fair, balanced and understandable’. They were ‘the most powerful three words we have written’, she said. It had, as she put it ‘transformed disclosure’. All of these different developments had changed the landscape, as the Deloitte survey had made clear.

But there is much still to be done. Russ Houlden, CFO at United Utilities, referred back to the finding of the survey that the average length of annual reports had quadrupled over the last 20 years and was still growing. He pointed to the possibility that a greater focus on materiality and the resulting possibility of excising of chunks of the annual report might help. But it would all be down to judgement and that, as Houlden pointed out, ‘left companies with concern that potential benefits from cutting clutter could be outweighed by the potential challenge from Financial Reporting Review Panel comments’. He suggested that companies should be able to have a ‘fireside chat’ with the FRC as they mulled over what they might chop out of the annual report on grounds of materiality. Melanie McLaren commented that it is only a small proportion of all companies that are reviewed by the FRRP and receive a letter from them. And she said that the FRC are indeed exploring ways of being more transparent.

One route was suggested by Leon Kamhi, head of responsibility with Hermes Investment Management. He pointed out that in some sectors there were often over 500 pages in an annual report, significant chunks of it unintelligible except to experts. He suggested that putting much of the specialist information into an appendix but putting a short and well explained digest of the information in the front section would help. It would also act as a good discipline for such companies and force them to explain such areas in a clear and concise fashion.

Kamhi also, in the same week that the IASB issued a call for investors’ views as part of its agenda consultation, urged the investor community to speak up and play a more active part in shaping the future of corporate reporting. He wanted them to make the relationship between the clarity of corporate communication and the benefit to the long-term nature of the investment in pensions plainer. And Melanie McLaren was clear how good UK corporate reporting helped. ‘The UK is a place where investors can invest with confidence’, she said. But the need for clarity around the nature of the primary user of the accounts was also emphasised. The IASB’s call for views identified nine different types of investors. It is hard to work out how best to communicate if you haven’t got a clear view of the identity of your audience.

And along with other panel members Kamhi emphasised how the changes in corporate reporting probably worked best when they were voluntary rather mandatory. Russ Houlden was clear that integrated reporting worked best as a system because it was primarily a voluntary rather than a mandatory framework. Melanie McLaren was clear that when it came to the issue of key performance indicators, particularly non-financial ones, ‘we are a long way off mandating what they should be and mandating assurance’. Overall the panel took the view that the system was most beneficial when preparers were encouraged to experiment and tell their story in their own way. And McLaren pointed to the example of the principle of ‘fair, balanced and understandable’ being left deliberately undefined to ensure that managements had to exercise judgement.

The discussions at the seminar reflected a larger overall observation that all these significant changes in the corporate reporting world had been cumulative. The wider message was consistent. The quality of corporate reporting has improved significantly over the years but the changes were coming about one step at a time. And that way they were both more digestible and more effective. The messages from the Deloitte survey stood testimony to that.