We comment on FRED 64 — Draft amendments to FRS 103 Insurance Contracts

26 Feb, 2016

We have published our comment letter on the Financial Reporting Council’s (FRC’s) Financial Reporting Exposure Draft (FRED) 64 ‘Draft amendments to FRS 103 Insurance Contracts’.

FRED 64 proposes updating the terminology and definitions used in FRS 103 as a result of the implementation of Solvency II.  The main changes that have been made are:

  • Removal of references to the PRA realistic capital regime and the Prudential Sourcebook for Insurers (INSPRU) which will be replaced with the commencement of Solvency II.
  • Clarification that entities should be permitted to continue to apply established accounting practice in their financial statements under the Solvency II regime and hence are not required to change their accounting policies.
  • Clarification of the scope of the Standard for with-profits businesses and with-profits funds in paragraph 3.1b.  

Overall we support the proposal to revise FRS 103 and the related Implementation Guidance for the changes in the insurance companies’ regulatory requirements currently referred to in the Standard. 

Our key comments are as follows: 

  • We agree with FRC’s decision to retain the approach of allowing continuation of existing accounting policies and methodologies unless the introduction of new policies represents an improvement. We agree that no entity should be forced to adopt a Solvency II method of calculating their insurance liability provisions in their financial statements and that those entities who wish do so must follow the change of accounting policy guidance in the Standard.  In our view, this would ensure consistency and comparability between entities and over time.
  • We note that certain accounting requirements, such as the need for the equalisation reserve to be shown as provision in the insurer’s balance sheet, are contained in the law. The introduction of Solvency II regulation from 1 January 2016 brings into question the interaction between the regulatory, statutory and financial reporting requirements.
  • We recommend clarifying the references in FRED 64 to ‘regulatory framework’ and ‘statutory basis’, in some cases to refer to the current position and in others to the position immediately prior to 1 January 2016. Currently this term is not defined and is used to convey a variety of meanings in different context. In our view, it is important to give clarity to this term to ensure precise application of the revised FRS 103 provisions and revised implementation guidance.
  • Finally, we note that some of the definitions used in the standard relate to the previous UK regime. It will be necessary to include equivalent material for the Republic of Ireland in the finalised standard.

Further comments and a full response to all questions raised in the invitation to comment are contained within the full comment letter.

EFRAG issues feedback statement on the Draft IFRIC Interpretation DI/2015/1

26 Feb, 2016

The European Financial Reporting Advisory Group (EFRAG) has published its feedback statement summarising the main comments received from constituents invited to respond to its draft comment letter in relation to the IFRS Interpretations Committee exposure draft DI/2015/1 'Uncertainty over Income Tax Treatments'.

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.  The draft interpretation 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.

EFRAG published its draft comment letter in November 2015 and its final comment letter in February 2016.

The feedback statement summarises the main comments received by EFRAG in relation to the draft comment letter and explains how those comments were considered by EFRAG in reaching its final position on the DI set out in their final comment letter to the IASB.

The press release and full feedback statement are available on the EFRAG website.

IFAC announces 2015 editions of various handbooks

25 Feb, 2016

The International Federation of Accountants (IFAC) has announced the availability of the 2015 editions of the handbooks from the International Auditing and Assurance Standards Board (IAASB), International Accounting Education Standards Board (IAESB), International Ethics Standards Board for Accountants (IESBA), and International Public Sector Accounting Standards Board (IPSASB).

The pub­li­ca­tions are:

  • 2015 Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pro­nounce­ments.
  • 2015 Handbook of the Code of Ethics for Pro­fes­sional Ac­coun­tants.
  • 2015 Handbook of International Public Sector Accounting Pro­nounce­ments.
  • 2015 Handbook of International Education Pronouncements.

For more in­for­ma­tion, see the press release on the IFAC’s website.

FASB issues ASU on leases

25 Feb, 2016

The FASB has issued its new leases standard, ASU 2016-02.

The ASU introduces a lessee model that brings most leases on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard, ASC 606, Revenue From Contracts With Customers. The new leases standard represents a wholesale change to lease accounting and will most likely result in significant implementation challenges during the transition period and beyond.

The new guidance will be effective for public business entities for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein. For all other entities, the ASU will be effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning on January 1, 2020), and interim periods thereafter. Early adoption will be permitted for all entities.

The leases project was part of a convergence effort between the IASB and FASB; however, the IASB’s counterpart standard, IFRS 16, contains notable differences from ASU 2016-02. For instance, the IASB’s standard has a single lessee accounting model while the FASB’s has a dual lessee accounting model. However, both standards require that assets and liabilities be recognized (with limited exceptions).

For more information, see Deloitte's related Heads Up newsletter as well as the press release, FASB in Focus newsletter, ASU, cost-benefit analysis, and video discussion by FASB Vice-Chairman Jim Kroeker and Board members Tom Linsmeier and Hal Schroeder on the FASB’s Web site.

FRC seeking new deputy chairman and members for the FRRP

24 Feb, 2016

The Financial Reporting Council (FRC) is seeking a new deputy chairman and members for the Financial Reporting Review Panel (FRRP).

The new deputy chairman will advise the Corporate Reporting Review team on specific reporting and accounting issues.  The new members of the FRRP will undertake peer reviews of the quality of reporting by the UK’s largest companies.

Please click for more information on the FRC website

EFRAG comment letter and feedback statement on the proposed amended IFRS Taxonomy due process

24 Feb, 2016

The European Financial Reporting Advisory Group (EFRAG) has issued its final comment letter on the IFRS Foundation's invitation to comment on proposed amendments to the due process for the development and maintenance of the IFRS Taxonomy, which would give the IASB greater involvement and responsibility. EFRAG has also issued the related feedback statement summarising the main comments received from constituents invited to respond to its draft comment letter.

In its comment letter on the November 2015 proposals, EFRAG acknowledges that it is important to continue to develop and maintain an IFRS Taxonomy in order to control the quality of the taxonomy and the use of the 'IFRS' brand name. 

However, EFRAG is worried that the proposed amendments might give the IFRS Taxonomy too much prominence in the IASB's activities.  It also comments that the IASB “should ensure that the IFRS Taxonomy does not drive the disclosure requirements in the standard-setting process and thereby risk moving away from a principles-based approach”. 

EFRAG also warns against additional tasks for Board members as these could only come at the cost of spending less time on the tasks they already have.

Finally EFRAG “proposes the establishment of a specialised committee similar to the IFRS Interpretations Committee with specific rights and obligations” in order to provide “a robust due process and governance that gives legitimacy to the IFRS Taxonomy”. 

The press release, comment letter and feedback statement are available on the EFRAG website.

Agenda posted for the March 2016 Global Preparers Forum meeting

23 Feb, 2016

Representatives of the International Accounting Standards Board (IASB) will meet with the Global Preparers Forum (GPF) in London on Wednesday, 2 March 2016. The agenda for the meeting has been released, which includes updates from the IASB and IFRS Interpretations Committee, discussions on specific topics including the disclosure initiative, effectiveness of disclosures, share-based payment, impairment requirements in IAS 36, and rate-regulated activities.

The full agenda for the meeting is sum­marised below:

Wednesday, 2 March 2016 (10:10-17:00)

  • IASB update:
    • Major standards.
    • Research ac­tiv­i­ties.
    • Other ac­tiv­i­ties.
  • IFRS In­ter­pre­ta­tions Committee update:
    • Activities of Interpretation Committee.
    • Implementation of IFRS 15 and IFRS 16.
  • Dis­clo­sure Ini­tia­tive: Principles of Disclosure Discussion Paper.
  • Preparers’ experience with improving effectiveness of disclosures.
  • IFRS 2 Share-based Payment
  • Improvements to the impairment requirements in IAS 36.
  • Rate-regulated activities.

Agenda papers for this meeting are available on the IASB's website.

Trustees announce IASB membership update

23 Feb, 2016

The Trustees of the IFRS Foundation, the oversight body of the International Accounting Standards Board (IASB), have reappointed IASB Board member Takatsugu Ochi to serve a second three-year term starting on 1 July 2016. In addition, the Trustees announced that current IASB Board member Pat Finnegan will be retiring from his position on 30 June 2016.

For more in­for­ma­tion, see the press release on the IASB website.

Three year programme announced to integrate sustainability into investors’ fiduciary duties

22 Feb, 2016

The United Nations Environment Programme Finance Initiative (UNEP FI), the Principles for Responsible Investment (PRI) and The Generation Foundation have announced a three year programme to integrate sustainability into investors’ fiduciary duties.

The project seeks to “engage asset owners, asset managers and policy makers across national and international jurisdictions to harmonise a global understanding of fidiciaty duty which incorporates sustainability”.

The project builds upon the findings of a report published in September 2015 and will focus on three primary objectives:

To encourage governments and regulatory agencies in the eight jurisdictions covered in the 2015 report (Australia, Brazil, Canada, Germany, Japan, South Africa, the UK and US) to clarify the scope of fiduciary duty such that investors must take explicit account of environmental, social and governance issues in their investment practices and proactively engage with companies on these issues.

To extend the original report’s analysis to key Asian markets: China (including Hong Kong), India, Malaysia, Singapore and South Korea. Developing country strategy plans for each of these jurisdictions and implementing country-specific recommendations accordingly.

To develop an international statement on fiduciary duty and sustainable development which would create a cohort of signatories committed to integrating sustainability into their fiduciary duties.

 The press release and more details about the project are available on the UNEP FI website.

ICAEW report into establishing materiality when providing assurance over non-financial information

22 Feb, 2016

The Institute of Chartered Accountants in England and Wales (ICAEW) has published a report which highlights the key areas that assurance providers should focus on when establishing materiality levels in order to provide assurance over non-financial information.

The report highlights that when attempting to provide assurance over non-financial information, the objective – “to reduce the risk of a material misstatement of the subject matter to a low level” – is the same as that when assessing financial information.  However, there are challenges in establishing materiality in the context of assessing a non-financial report.

The main focus of the report is around how a practitioner decides what is material in order to be able to determine the level and extent of testing procedures.  The report identifies a number of steps that the practitioner could follow:

  • Gain an understanding of the non-financial report content.  This would include the management process used to develop and define the report content and evaluating and understanding controls that management might have in place around the preparation of the information.
  • Identify what within the non-financial information requires assuring and establish suitable measures to support tests used to evaluate content. 
  • Identify claims and significant claims within the non-financial information.  The practitioner will need to use their understanding of the non-financial information to determine the significant claims investors will rely most upon. 
  • Establish key assertions for each significant claim.  The report notes that for quantitative claims assertions will be existence, accuracy, ownership and presentation – very similar to those when assessing financial information.  For qualitative claims, the report identifies the assertions will typically be completeness, occurrence and accuracy and presentation and understandability.
  • For each significant claim of the subject matter being reported on, identify a materiality threshold (if the subject matter is quantitative) or materiality factors (if the subject matter is qualitative). 

The report highlights that when setting a materiality threshold factors such as the intended needs of the user are important. 

The report also identifies a number of ‘materiality factors’ that should be considered when determining whether there has been a material misstatement of qualitative information.  These would include factors such as: 

  • Has there been an omission of facts? 
  • Has there been a misstatement of facts? 
  • Is there a misrepresentation of trends? 
  • Are claims unsubstantiated?  

For each of these factors the report highlights that “the practitioner needs to obtain sufficient evidence so as to be able to reach a reasonable opinion as to whether the user of the report might have been materially misled”.

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

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