November

ACCA interview with IASB Chairman Hans Hoogervorst

23 Nov, 2015

The Association of Chartered Certified Accountants (ACCA) has made available a short recorded interview with IASB Chairman Hans Hoogervorst entitled 'IASB takes stock'.

In the interview, Mr Hoogervorst generally takes stock and then expands on four questions:

  • Has the Board's private, not-for-profit status been a hindrance or a help?
  • Who are IFRS for?
  • How do you think the Board's due process has been working?
  • What's next for the IASB?

Please click to access the interview, which runs slightly over five minutes, on the ACCA website.

BIS consults on deregulatory changes for LLPs and qualifying partnerships as a result of the UK implementation of the EU Accounting Directive

23 Nov, 2015

The Department for Business, Innovation and Skills (BIS) has issued a consultation on deregulatory changes for LLPs and qualifying partnerships as a result of the UK implementation of the EU Accounting Directive (‘the LLPs and qualifying partnerships consultation’). Comments are requested by 21 December 2015.

The European Union published the EU Accounting Directive 2013/34/EU (‘the Directive’) on 26 June 2013. The Directive aimed to simplify the accounting requirements for small companies and improves the clarity and comparability of companies' financial statements within the Union.

Following a consultation by BIS in August 2014 and government response in January 2015, regulations were made (the Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015) which implemented the EU Accounting Directive for limited companies.  Changes were also made by the Financial Reporting Council (FRC) to UK accounting standards in July 2015 to implement those changes.  At that time, the Government indicated that it would be consulting separately for LLPs and qualifying partnerships.

The LLPs and qualifying partnerships consultation proposes to introduce similar changes to the regulatory framework for LLPs. 

The main changes proposed by BIS are to:

  • Increase thresholds used to determine the size of LLPs. The thresholds for determining what is a small LLP will, as for companies, be raised to the top end of the range permitted by the Directive. An LLP will be small if it meets at least two of: total assets <£5.1m, turnover <£10.2m, <50 employees.  An LLP will be medium-sized if it meets at least two of: total assets<£18m, turnover <£36m, <250 employees.
  • Limit the number of mandatory notes required of small LLPs.  Small LLPs will be required to provide thirteen disclosure notes as indicated in the consultation.
  • Introduce a micro-entity regime for LLPs allowing the smallest LLPs in the UK access to a much less burdensome administrative regime.  An LLP will qualify if it meets at least two of: total assets <316,000, turnover <632,000 and average number of employees <10.
  • Propose to introduce a micro-entity regime for qualifying partnerships.  This would be available to those general partnerships and limited partnerships that are Qualifying Partnerships under the Partnerships (Accounts) Regulations 2008 (SI 2008/569) as amended by the Companies and Partnerships (Accounts and Audit) Regulations 2013 (SI 2013/2005) and which meet the eligibility criteria.
  • Provide LLPs with the opportunity to use alternative layouts when preparing their profit and loss account and balance sheet, provided that the information given is at least equivalent to the information otherwise required by the standard formats.
  • Allow small LLPs to prepare an abridged balance sheet and profit and loss account if approved by all members of an LLP.
  • Amend the approach in relation to the writing off of goodwill and development costs. In the rare situations where the useful economic life cannot be reliably estimated, the government is proposing that they should be amortised over a maximum of ten years (the top end of the range permitted by the Directive).  Reversals of goodwill impairment will be prohibited.
  • Permit the use of the “equity method” in individual LLP statements.

In addition to aligning the accounting requirements between companies and LLPs, BIS also proposes to align the auditing provisions as well.  The LLPs and qualifying partnerships consultation also includes changes to:

  • The audit exemption criteria for small LLPs including increasing the thresholds for the exemption.
  • The audit exemption for LLPs who receive a parental guarantee.  This exemption will no longer be available for LLPs with securities are traded on a regulated market in an EEA state.
  • The dormant LLPs audit exemption.  For LLPs whose securities are traded on a regulated market this exemption will no longer be available.

It is proposed that the new framework will apply for financial years beginning on or after 1 January 2016.  The consultation asks a question about whether early adoption should be permitted for financial years beginning on or after 1 January 2015.

*On 30th November BIS published an update to the original consultation document to clarify that the question of whether specific thresholds for the audit exemption should be introduced, and if so, at what level, is still under consideration*.

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FTSE 350 Audit Committee Chairs pleased with audit quality

23 Nov, 2015

Results of a survey seeking to understand what FTSE 350 Audit Committee Chairs (ACCs) think about audit quality indicate that they “generally view the quality of their current auditors in a very positive light”.

This is the conclusion from the latest Audit Committee Chairs Survey 2015 overseen by the Financial Reporting Council (FRC).  All FTSE 350 ACCs and a number from those outside of the FTSE 350 were sent the survey of eight questions on audit quality.  The results indicate:

  • Feedback on audit quality was “overwhelmingly positive”.  A number commented that the quality of the audit engagement partner was “crucial” to their assessment of the quality of the audit.
  • The highest score was in response to the degree at which the external auditor exhibited independence and objectivity.
  • Lowest scores were rated for the level of professional scepticism demonstrated by the external auditor and the quality of the external auditor’s response to regulatory oversight, suggesting further work in these areas is still required.

The press release along with a letter sent to the ACCs summarising the results of the survey are available on the FRC website.  Our news article summarising the FRC’s Audit Quality Inspection Annual Report for 2014/15 is available here.

FEE calls for an international solution of the effective date problem

21 Nov, 2015

The Federation of European Accountants (Fédération des Experts-comptables Européens, FEE) has commented on the draft letter from the European Financial Reporting Advisory Group (EFRAG) to the European Commission supplementing its endorsement advice on adoption of IFRS 9 'Financial Instruments'.

Just as the European Securities and Markets Authority (ESMA) yesterday, FEE believes the problem should not be solved on a European level alone (by means of a carve-out). On 10 November 2015, EFRAG published a draft letter to the European Commission, stating that EFRAG is "not in a position to amend" its endorsement advice on IFRS 9 and extend it to businesses carrying out insurance activities.

FEE point out that the problem does not only affects European companies, therefore an international solution needs to be found - as the IASB is trying to do in its dedicated limited scope project. However, FEE notes in its letter that the approaches the IASB is pursuing are of different merit. FEE believes that the deferral approach should be chosen over the overlay approach as the latter was too complex. However, FEE also points out that the deferral approach needs to be investigated further as the current requirement of passing an insurance activities’ predominance test at the reporting entity level would mean that some insurers and more generally the insurance activities included in the financial statements of banking groups would not qualify. FEE suggests finding a deferral solution that goes below the reporting entity level or to widen the scope of the solution by reconsidering the predominance test for insurance activities.

Please click to access the full comment letter on the FEE website.

ESMA responds to the Review of Structure and Effectiveness of the IFRS Foundation

20 Nov, 2015

The European Securities and Markets Authority (ESMA) has responded to the IFRS Foundation's Request for Views on its Review of Structure and Effectiveness.

ESMA makes the following main points in its response to the IFRS Foundation's Request for Views.

  • Setting financial reporting standards for listed entities, rather than public sector or not-for-profit organisations, should remain the main focus and priority of the IASB.
  • The IASB and IFRS Foundation should aim to create the circumstances that contribute to the consistent application of IFRS across jurisdictions and industries. The establishment of Transition Resource Groups has been useful in bridging the gap between standard-setting and implementation and the Trustees should formalise the structure and use of these.
  • ESMA views the IFRS Interpretations Committee as indispensable but calls on the Trustees to further enhance its functioning and effectiveness. It also calls for a re-assessment of the composition of the Committee to ensure that it contains an appropriate balance of professional backgrounds.
  • ESMA considers that the basic governance arrangements of the IFRS Foundation continue to be appropriate.  While it does not object to the Trustees proposed organisations changes, it suggests that additional efforts to safeguard the public accountability of the IFRS Foundation be reflected in the changes to the Constitution.

The full response can be found on the ESMA website.

ACCA report into the challenges of providing independent assurance over an integrated report

20 Nov, 2015

The Association of Chartered Certified Accountants (ACCA) has published a report into what it sees as the challenges to providing independent assurance over an integrated report. The report concludes that the absence of suitable criteria upon which to audit the integrated report against is “the most significant obstacle to assurance over the integrated report, more so than the risk of auditor liability”.

The report The Challenges of Assuring Integrated Reports: Views from the South African Auditing Community focuses on the issue of independent assurance over an integrated report.  It looks at whether an integrated report can, and should, be subject to independent assurance in the same way that such assurance is provided on annual reports and financial statements.  Views are obtained from a number of senior assurance practitioners from South Africa where all listed companies must prepare an integrated report.  It highlights that although there is support for independent assurance over an integrated report, there are a number of technical and legal challenges that need to be overcome.

The report indicates that assurance over an integrated report has the potential to add value to the by improving the report’s credibility. 

However a number of technical challenges including the difficulty of developing suitable criteria for assuring the integrated report, the limited range of skills of a traditional audit team and the adequacy of a client’s records, systems and controls “make it impossible to assure the entire integrated report”.  As a result, the report concludes that “only certain parts of the integrated reports can, currently, be the subject of an assurance engagement”. 

The ACCA sees that assurance could be provided over those parts of the report that provide factual disclosures but “information that is abstract, interpretative predictive or qualitative is too subjective to be the subject of a limited or reasonable assurance engagement”. 

The ACCA also warns that even if suitable criteria can be developed to audit against, this could have the unintended consequence “of limiting the relevance of information included in integrated reports as companies limit disclosures to only those which can be objectively verified”.

The report makes a number of recommendations:

  • In the short term, develop a set of guidelines which recommend those parts of the integrated report that should be the subject of an assurance engagement and offer a basis for describing how assurance is provided over the material components of the integrated report.
  • In the long run, possibly develop an alternative assurance model which does not express an opinion on the extent to which the integrated report complies with the International Integrated Reporting Council (IIRC) Framework but instead provides something similar to a panel review by suitably qualified experts.  The ACCA highlight that there is a risk that this new level assurance “will fail to command the same respect as the audit of financial statements and will simply expand or perpetuate the audit expectation gap”.
  • Before the creation of such an assurance model, companies should actually engage with stakeholders to determine the extent of demand for such assurance.

The press release and full report are available on the ACCA website.

ICAEW responds to IASB consultation on the Conceptual Framework

20 Nov, 2015

The Institute of Chartered Accountants in England and Wales (ICAEW) has published its responses to the IASB's exposure drafts (EDs) 'Conceptual Framework for Financial Reporting' and 'Updating References to the Conceptual Framework'. Overall ICAEW welcomes the EDs but has concerns about several areas where they find the proposals unconvincing.

In its responses to the exposure drafts, the ICAEW comments on the IASB's proposals in various areas. Their major points include the following.

  • They believe that the IASB should clarify the relationship between the terms 'faithful representation' (used in the Framework), 'fair presentation' (used in IAS 1 and IAS 8) and 'true and fair view' (a concept that occurs in the laws of many jurisdictions that have adopted IFRS).
  • They disagree with the way in which prudence is being reintroduced into the Framework.
  • They do not agree with the ED's definition of a liability.
  • They believe that the ED's description of measurement bases needs more thought, including consideration of the measurement requirements of recent standards such as IFRS 9 and IFRS 15.
  • They believe that more work is needed on the subject of distinguishing profit or loss from other comprehensive income.
  • They are concerned that the changes proposed by the exposure draft on updating references imply that entities should review all accounting policies adopted for transactions that are not specifically covered by an IFRS. They believe that this would be unduly onerous and the amendments should only be applied when an entity is developing a new accounting policy or reviewing an existing policy for other reasons.

The following can be obtained from the ICAEW website:

ICAEW webinar on the FRC’s draft guidance on going concern for non-Code companies

20 Nov, 2015

The Institute of Chartered Accountants in England and Wales (ICAEW) will be holding a webinar in December 2015 to discuss the FRC’s draft guidance on going concern for non-code companies that was issued for comment in October 2015.

Topics covered in the webinar include:

  • Scope of the draft guidance.
  • Key features of the draft guidance.
  • Practical considerations and next steps.

Registration details for the webinar are available on the ICAEW website

ESMA believes IFRS 9 carve-out for insurance activities "not a feasible solution"

20 Nov, 2015

The European Securities and Markets Authority (ESMA) has commented on the draft letter from the European Financial Reporting Advisory Group (EFRAG) to the European Commission supplementing its endorsement advice on adoption of IFRS 9 'Financial Instruments'.

On 10 November 2015, EFRAG published a draft letter to the European Commission, stating that EFRAG is "not in a position to amend" its endorsement advice on IFRS 9 although the IASB has decided to propose a deferral approach and an overlay approach, both aimed at addressing the mismatch, in December this year. EFRAG argued that any final decisions in the project will be made at the earliest in six to nine months from now and that uncertainty exists as to whether the IASB will provide an appropriate remedy when it makes these final decisions.

In its letter to EFRAG, ESMA emphasises the importance of fully implementing IFRS 9 and of applying the expected loss model to financial assets in a timely manner, as the introduction of the expected loss model responds to an important G20 request following the financial crisis. Even though final amendments to IFRS 4 adressing the mismatch are not to be expected until mid-2016, ESMA highlights that the IASB responded quickly and adequately to EFRAG’s concerns about the different application dates. ESMA states:

ESMA reiterates its position that a European carve-out is not a feasible solution for insurance activities in light of their global nature. [...] In light of the solution for the insurance industry being developed by the IASB, ESMA is of the view that EFRAG should enable endorsement of IFRS 9 in the EU as soon as possible.

Please click for access to the full comment letter on the ESMA website.

FRC event on its monitoring activities

20 Nov, 2015

The Financial Reporting Council (FRC) will be holding an investor-only event in November 2015. The event will discuss key findings from its monitoring activities over the last year and priorities for next year and will highlight the key risks that companies are identifying in their audit reports and those that the FRC are focusing on.

The detailed agenda as well as registration details are available on the FRC website.

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