November

EFRAG issues feedback statement on the IASB's exposure draft of proposed amendments on the application of the definition of a business

29 Nov, 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 International Accounting Standards Board’s (IASB’s) Exposure Draft ED/2016/1 'Definition of a Business and Accounting for Previously Held Interests'.

The amendments propose to clarify:

  • the definition of a business; and
  • the accounting for previously held interests when an entity obtains control of a business that is a joint operation and when it obtains joint control of a business that is a joint operation. 

EFRAG published its draft comment letter in July 2016 and its final comment letter in November 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 IASB ED set out in their final comment letter to the IASB. 

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

Closing Out 2016

28 Nov, 2016

Welcome to our one-stop guide for all the issues you need to consider as you prepare your December 2016 accounts and look forward to 2017.

A key theme running through 2016 has been one of uncertainty, whether over the timing and terms of the UK’s exit from the European Union following the result of June’s referendum, the possible changes in U.S. policy following the result of the presidential election or from other sources such as the continuing conflict in the Middle East. 

The reporting and, significantly, disclosure of such risks and their potential effects on a company’s performance is a key area of focus for the Financial Reporting Council (FRC) as discussed in its Annual Review of Corporate Reporting 2015/16. Other areas of focus also centre on effective, clear and unbiased communication with investors, for example:

In addition, while the changes to accounting requirements effective this year are limited, there is a high level of interest in disclosure of the likely effects of upcoming standards such as IFRS 15 on revenue and IFRS 9 on financial instruments, with a clear expectation from both the FRC and the European Securities and Markets Authority (ESMA) that clear, entity specific information will be included in 2016 financial statements. 

More broadly, initiatives in areas such as integrated reporting, disclosure of dividend policies and business model reporting continue to gain traction with the FRC reminding directors of their responsibility under the Companies Act to have regard to stakeholders such as employees, suppliers and customers in promoting the success of the company. 

Our Closing Out 2016 publication covers all these topics and more and will help you to navigate your way through the increasingly complex and interconnected issues surrounding corporate reporting.

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FRC publishes the results of its thematic review into the use of APMs

25 Nov, 2016

The Financial Reporting Council (FRC) has today published the results of its thematic review into companies’ use of Alternative Performance Measures (APMs) in their narrative reporting.

The thematic review was conducted following concerns expressed by a number of stakeholders, as well as the FRC in its recently published Annual Review of Corporate Reporting, and the coming into force on 3 July of the Guidelines on Alternative Performance Measures (“the Guidelines”), issued by the European Securities and Markets Authority (ESMA). 

The interim financial statements (30 June 2016) of 20 listed companies spread across the FTSE 100, FTSE 250 and smaller companies were reviewed.  The review aimed to establish the extent to which the financial statements were consistent with the Guidelines and identify areas that companies need to take into account when preparing their December year-end strategic reports. 

The thematic review firstly looked at consistency with the Guidelines.  Key findings in this respect included:

  • With the exception of one company, all companies provided definitions of at least the most significant APMs used together with reconciliations to IFRS measures where appropriate.
  • Descriptions of APMs were not misleading and made it clear what the APM was. Descriptions were less clear for some of the items excluded in arriving at adjusted measures of profit.
  • There were varied explanations given as to how companies had determined that it was beneficial to disclose APMs. Whilst all FTSE 100 and FTSE 250 companies provided some explanation this was not so true of the smaller companies in the sample.  Some companies provided “cursory, boilerplate” explanations.  The FRC has indicated that “a good explanation states why an APM is useful, helpful or more meaningful rather than asserting that this is the case and clarifies whether an APM is used internally, why it is so used, by whom and for what purpose”.  It urges companies to ensure that their explanations “properly reflect why they believe the additional information is useful to investors and other users of their accounts”. 
  • Seven companies in the sample had made changes to ensure greater consistency with the Guidelines. Changes were largely made to give either new or enhanced explanations for their use of APMs.    

As well as assessing consistency with the Guidelines, the thematic review in particular looked at how the adjusted measures of profit were defined, how they were disclosed and how they differed from the corresponding IFRS measure.  Within the sample, 18 used adjusted measures of profit.  Key findings in this respect included:

  • There were a wide variety of terms used to refer to adjusted measure of profit including ‘adjusted’ and ‘normalised’. In 78% of cases, this alternative measure of profit was higher than the equivalent IFRS measure.
  • Some of the definitions gave rise to concerns about why certain items, in particular ‘restructuring costs’ had been excluded from the measure. The FRC indicates that better explanations as to why such items had been excluded would help to mitigate such concerns.  The FRC draws attention to its press release in December 2013 regarding consistency in the reporting of exceptional items. 

The FRC indicates that in its reviews of the December 2016 accounts it will question companies where: 

  • Good explanations for the use of APMs and for any changes made in the APMs used, including changes in definition, are not provided.
  • Good explanations of why items have been excluded from adjusted measures of profit are not provided and, in particular, where an item is excluded from adjusted profit that it has not seen others exclude.
  • A description such as non-recurring is used and that description does not appear to apply in the circumstances.
  • There is no discussion of either the IFRS results themselves or of the adjustments made to those results to arrive at adjusted profit.
  • The IFRS results are not highlighted at an early point in the narrative. 

The press release and thematic review are available on the FRC website.

European Commission announces decision to adopt IFRS 9

25 Nov, 2016

On 22 November, the International Financial Reporting Standard (IFRS) 9 on Financial Instruments was adopted into EU law. There is no entry in the Offical Journal yet, however, the European Commission (EC) communicated the decision by press release.

After a positive opinion by the Accounting Regulatory Committee on 27 June 2016 and after a 3 months scrutiny period by the European Parliament and the Council that ended on 7 October 2016, the Commission has completed the endorsement process of IFRS 9 Financial Instruments.

The decision was made public in the EC's Banking and finance newsletter and a press release on the EC's Company reporting website.

Two AASB papers for the upcoming ASAF meeting

25 Nov, 2016

The Australian Accounting Standards Board (AASB) has published two papers that will be discussed by members during the upcoming meeting of the Accounting Standards Advisory Forum (ASAF) at the IASB's offices in London on 8 and 9 December 2016: one on digital currency and one on country-by-country reporting.

Digital currency – A case for standard setting activity recommends the IASB develop a standard that addresses the accounting for investments in intangible assets or other commodity type assets that are not financial instruments or inventory as the current alternatives to account for digital currencies (IAS 2 or IAS 38) do not provide relevant information to users of financial statements and as this issue highlights a broader issue with IFRSs in that there is no accounting standard that deals with investments in intangible assets or other commodity type assets that are not financial instruments or inventory. Please click to access the paper on the AASB website.

The second paper offers an update on the AASB approach to country-by-country reporting and argues that while much of the tax transparency initiative to date has been driven by the tax authorities, as part of remaining relevant in an ever-changing regulatory environment, it is timely for accounting standard-setters to take a leadership role in improving income tax disclosures for users of financial reports. Please click to access the paper on the AASB website.

EBA launches second impact assessment of IFRS 9 on banks

25 Nov, 2016

The European Banking Authority (EBA) has launched a second impact assessment of IFRS 9 'Financial Instruments' on a sample of approximately 50 institutions across the European Union.

The second assessment builds on the on the results of the first exercise published on 10 November 2016. As announced, the EBA expects that institutions will be able to provide more detailed and accurate insights into their implementation of IFRS 9 as the information provided by the respondents in the first exercise reflected the early stage of implementation. The new exercise builds on the objectives of the first impact assessment, namely the estimated impact of IFRS 9 on regulatory own funds, the interaction between IFRS 9 and other prudential requirements, and the implementation issues relating to IFRS 9.

Please click for the press release on the EBA website.

IASB podcast on tentative decisions in the insurance project

24 Nov, 2016

The IASB has released a podcast discussing the deliberations at the November 2016 IASB meeting on the issues that have arisen from the external testing of a draft of IFRS 17 'Insurance Contracts' and in the drafting process thus far.

During the insurance contracts session, the Board also decided to set the mandatory effective date for IFRS 17 as for annual periods beginning on or after 1 January 2021.

Please click to access the podcast (approx. 9 minutes long) on the IASB website.

Report on corporate governance policy in the European Union

24 Nov, 2016

The CFA Institute, a global association of investment professionals, has published 'Corporate Governance Policy in the European Union: Through an Investor’s Lens'. The report identifies that investors believe there is still much that could be done in Europe to simplify mechanisms to enhance corporate accountability and realise maximum value from reforms that have already been undertaken.

The findings note that investors are open to many stakeholder issues, such as promoting board diversity, environmental reporting, or good corporate citizenship more generally. The 2013 Accounting Directive including provisions on country-by-country reporting for the extractive industries and the 2014 amendments to the Accounting Directive with its focus on nonfinancial statement disclosures, including information relating to ESG issues, sustainability, and disclosure of diversity policies, are cited as examples of the need for integrated reporting and for harmonising reporting and disclosure standards, including nonfinancial reporting.

Please click to access the full report on the CFA Institute website (includes access to abstract, full PDF, summary, and references).

The Bruce Column — Moving towards a broader picture of stakeholder reporting

23 Nov, 2016

Robert Bruce, our regular, resident columnist, reports on a recent debate on the issues surrounding transparent corporate reporting.

For Melanie McLaren’s three teenage children the idea of a symposium to discuss the concept of transparent corporate reporting was mystifying. McLaren is Executive Director, Audit at the Financial Reporting Council, and she was launching an event at the Deloitte Academy to try and help pin down the many issues surrounding corporate reporting in a complicated, volatile, and ever-changing business world. But for her children such complexity doesn’t exist. If they want to know a fact or find out about an issue they simply go to Wikipedia and the answer will be there. What on earth did anyone need to talk further about? And, as McLaren asked: ‘If everything is available to everyone all the time what does that mean for corporate reporting?’

What it probably means is that she is expecting a deep debate as a result of recent questions raised by politicians over the level of trust in business; the possibility of extending business representation to ordinary employees; a range of reporting, environmental and sustainability issues; and those of gender and pay. For her the reporting was what was important. ‘What gets reported drives behaviour’, she said. And she followed that up with the idea that the corporate governance code provision laid down by the Financial Reporting Council that company directors should sign off the annual report and accounts with an assurance that the contents were ‘fair, balanced, and understandable’ pretty much encapsulated most of what was needed in terms of building trust in business.

Nevertheless she expects a deep Government-led debate in the UK over corporate governance and over building public trust in business. Though she did point to the results of much work in the field over the last twenty years or so and the reputational dividend that had produced. ‘The current UK framework is well-regarded’, she said.

So future policy has a firm foundation to build upon and will come incrementally. It will be part of a gradual evolution towards broader stakeholder reporting which will come via many different routes. And this is where the Government’s concerns could be answered. The desire and the need for a broader picture is already being met with moves towards better narrative reporting, the strategic report, integrated reporting and the integrated thinking it brings. All of this makes the value created for all stakeholders in a business much clearer and more transparent.

And the multiplicity of means provides solutions for many users. Jessica Fries, Executive Chairman at The Prince’s Accounting for Sustainability Project, stressed the importance of the annual report as a means of reporting at a specific point in time. It was then important to ensure that it was well signposted and reasonably consistent year-on-year. The length of the report was less important than the clarity of the report, she said. ‘Length doesn’t always get in the way of understandability’.

It fell to Alan Teixeira, Deloitte’s Global Director, IFRS Research, to answer the poser raised by Melanie McLaren’s children. ‘My kids tell me every day about how they’re are doing at school’, he said, ‘but that doesn’t mean I don’t need to read their school report’. The rapidly-evolving annual report will remain at the heart of corporate communication in a multiplicity of ways.

Agenda for the November 2016 GPF meeting

23 Nov, 2016

Representatives of the IASB will meet with the Global Preparers Forum (GPF) in London on Tuesday, 29 November 2016. The agenda for the meeting has been released.

The full agenda for the meeting is sum­marised below:

Tuesday, 29 November 2016 (13:00-16:30)

  • IASB and Interpretations Committee Update
  • Post-implementation Review of IFRS 13 Fair Value Measurement
  • Education Initiative commercial publications — possible improvements to the usefulness of
    • A Guide through IFRS Standards (the ‘Green Book’); and
    • A Briefing for Chief Executives, Audit Committees and Boards of Directors
  • Definition of a business

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

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