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March

Charity Commission publishes accounts templates pack for small charitable companies

31 Mar 2017

The Charity Commission has today published accounts templates for small charitable companies with income under £500,000 to help their trustees prepare accounts. The templates are applicable for reporting periods beginning or after 1 January 2015.

The Charity Commission indicates that around 77% of charitable companies on its register have income below £500,000 and highlights that the templates will “make it easier for charities to ensure their accounts are prepared in the correct format and to a good standard”.  Recent research undertaken by the Charity Commission highlighted that when charities used templates provided by the Charity Commission “they were much more likely to have followed the accounting standards”. 

These templates compliment the templates already published by the Charity Commission for non-company charities with incomes of £500,000 or less and Trustees’ annual report templates (both links to Charity Commission website).

The press release and the new accounts templates are available on the Charity Commission website.

May 2017 meeting of the ICAEW FRDG

31 Mar 2017

The next meeting of the Institute of Chartered Accountants in England and Wales (ICAEW) Financial Reporting Discussion Group (FRDG) will be held on 8 May 2017 in London. The meeting will provide a brief overview of the Financial Reporting Council’s (FRC’s) first triennial review of Financial Reporting Standard (FRS) 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.

A consultation document setting out the overall approach to the triennial review was published by the FRC in September 2016 and Financial Reporting Exposure Draft (FRED) 67 was published in March 2017.  

As well as providing a brief overview of the changes proposed the event will provide an opportunity to share and exchange views on what the changes will men in practice. 

Click for more information, including registration details on the ICAEW website.

We comment on the FRC consultation on its Corporate Reporting Research Activities

31 Mar 2017

We have published our comment letter on the Financial Reporting Council's (FRC's) Corporate Reporting Research Activities consultation.

We support the FRC’s work to identify and assess opportunities that aim to improve the quality of corporate reporting. It is imperative that the UK has a strong voice and seeks to influence the direction of standard setting and corporate reporting globally. The FRC has a long history of both independent standard-setting and contributions to standard-setting at an international level and has as a result significant knowledge and experience that should be leveraged on if the FRC’s stated aim that the UK should continue to be influential in the development of IFRSs following its exit from the European Union is to be achieved.

The output of the FRC’s work will be more effective in stimulating debate and influencing the IASB if its research is carried out through a global lens. Much of the practical experience drawn upon during research will, understandably, be from the UK environment, but a global focus should be the aim for findings to address the full scope of issues arising and, as result, to gain traction internationally.

The four projects identified in the Consultation Document concern areas which can present conceptual challenge in applying the principles of IFRS in practice. In fact, Deloitte Touche Tohmatsu Limited’s response to the IASB’s Request for Views: 2015 Agenda Consultation, highlighted non-reciprocal transactions (referred to as ‘non-exchange transactions’ in the Consultation Document) and variable consideration as two priority areas that should be added to the IASB’s Research Agenda even though they were not identified in the IASB’s Request for Views. 

Regarding research in the area of reporting to other stakeholders, whilst we understand that stakeholders other than investors may have legitimate case to ask for further information from organisations, the purpose of the annual report, as set out in the FRC’s Guidance on the Strategic Report, is ‘to provide shareholders with relevant information that is useful for making resource allocation decisions and assessing the directors’ stewardship’. As highlighted in the Consultation Document, there are many initiatives currently on-going looking at multi-stakeholder engagement and as such believe the FRC should not prioritise a project in this area, but instead, monitor and contribute to the work of the Corporate Reporting Dialogue.

Further we note the FRC’s response to the BEIS Green Paper on Corporate governance reform and its plans to revisit the Guidance on the Strategic Report to cover how matters referred to in s172 of the 2006 Companies Act have been taken into account by directors in promoting the success of the company by covering “how these factors were taken into account, describing the boards’ consultation mechanisms, the issues considered and trade-offs”. We welcome this initiative but view this as part of the FRC’s current standard setting rather than as research activities.

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

FRAB minutes for March 2017 meeting released

31 Mar 2017

The minutes of the Financial Reporting Advisory Board’s (FRAB’s) meeting of 16 March 2017 have been made available on the HM Treasury website.

The role of the Financial Reporting Advisory Board (FRAB) is “to ensure that government financial reporting meets the best possible standards of financial reporting by following Generally Accepted Accounting Practice (GAAP) as far as possible”.  The FRAB includes representatives from the accountancy profession in the private and public sectors, academia and government bodies.  The board meets regularly to consider proposed changes to policy and practice. 

Key topics discussed during the meeting included

  • International Financial Reporting Standard (IFRS) 9 Financial Instruments An update was provided on the three outstanding items identified from the November 2016 meeting.  Each of these issues was considered in turn.
  • IFRS 15 Revenue from Contracts with Customers update noting progress made to date on IFRS 15 implementation.
  • An update on IFRS 16 Leases since the November 2016 meeting. It was highlighted that a technical working group had been established with representatives from departments, the Chartered Institute of Public Finance and Accountancy (CIPFA) and trading companies covering both property and non-property leases.
  • Discount rates – a paper was presented setting out a project plan for reviewing the discount rate methodology. Views were asked on the scope, objectives and timing of the review. 

Click here for detailed minutes and other supporting documents on HM Treasury website.

BCBS has 'not yet reached a conclusion' on IFRS 9

31 Mar 2017

The Basel Committee on Banking Supervision (BCBS) has released a statement on the interim regulatory treatment of accounting provisions and standards in view of the limited time until the effective date of IFRS 9 'Financial Instruments'.

The statement stresses that the BCBS supports the use of expected credit loss (ECL) accounting approaches and encourages their application in a manner that will achieve earlier recognition of credit losses than incurred loss models while also providing incentives for banks to follow sound credit risk management practices. Still, the BCBS notes that the implementation of ECL accounting is likely to have fundamental implications for the regulatory capital and banks’ provisioning practices in qualitative and quantitative ways.

In view of the limited time until the effective date of IFRS 9 (1 January 2018), the BCBS has therefore decided to retain the current regulatory treatment of provisions under the Basel framework for an interim period. In the meantime, the BCBS will thoroughly review the longer-term regulatory treatment of provisions. The statement also notes that jurisdictions may adopt transitional arrangements to smooth any potential significant negative impact on regulatory capital arising from the introduction of ECL accounting.

Please click to access the BCBS statement on the website of the Bank for International Settlements (BIS).

IASB issues podcast on latest Board developments

31 Mar 2017

The IASB has released a podcast featuring its Chair, Hans Hoogervorst and Vice-Chair, Sue Lloyd discussing the deliberations at the March 2017 IASB meeting

The podcast features discussions of the following topics:

  • Wider corporate reporting,
  • Primary financial statements, and
  • Financial instruments with characteristics of equity.

The podcast can be accessed through the press release on the IASB website. More information on the topics discussed is available through our comprehensive notes taken by Deloitte observers of the March 2017 meeting.

FRC issues Plan and Budget for 2017/2018

30 Mar 2017

The Financial Reporting Council (FRC) has published its Plan and Budget, including its Levies, for 2017/18 which indicates those priorities that it will focus on in 2017/18.

The work plan includes a set of indicators, alongside each priority, that will assist the FRC in assessing the state of key aspects of corporate governance and reporting in the UK.

In 2017/18 the FRC’s priorities are: 

  • Promoting high quality corporate governance and effective investor stewardship. Key activities include:
    • Undertake a “fundamental” review of the UK Corporate Governance Code and its associated guidance.
    • Following its Corporate Culture report by monitoring and reporting on culture by companies and investors.
    • Scrutinising and reporting on the quality of reporting against the Stewardship Code and delisting signatories that fall within tier 3 unless they have taken action to improve their reporting.
  • Enhancing the speed and effectiveness of its enforcement role
    • The FRC will seek to expand its team and update its procedures to ensure that reviews can be completed as quickly as possible with sufficient resources. 
  • Promoting clear and concise corporate reporting. Key activities include:
    • Continuing to work to influence the development of International Financial Reporting Standards (IFRSs).
    • Producing a second annual assessment of the quality of corporate reporting in the UK, following its first report in October 2016.
    • Focusing corporate reporting reviews for the following priority sectors:
      • Property Travel and leisure.
      • Support services.
    • Conducting thematic studies of:
      • Disclosure of judgements and estimates.
      • Pension Disclosures.
      • Alternative performance measures.
    • Monitor disclosure relating to:
      • New accounting standard disclosures
      • Principal Risks and Uncertainties – specifically the effect of the decision to leave the EU and the low interest rate environment on risk disclosures.
    • Focus the work of the Financial Reporting Lab on:
      • Improving the reporting of Principal risks and viability statements.
      • The Digital Future: Data project.
      • Further initiatives on Clear & Concise reporting.
    • Updating its Guidance on the Strategic Report.
    • Conduct a triennial review of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland and continue to monitor its impact.
  • Promoting justifiable confidence in auditing. Key activities include
    • Fulfilling its responsibilities as the Competent Authority for audit in the UK
    • Publishing a second report on developments in Audit, following its first report in July 2016
    • Areas of focus include changes in auditor appointment, audit of pension balances and disclosures and impact of currency fluctuations.
    • Conducting thematic reviews of:
      • Auditor’s responsibilities for areas of the annual report beyond the financial statements;
      • Audit firm culture and governance; and
      • Materiality
    • Influencing the work of the International Auditing and Assurance Standards Board (IAASB) and other standard-setting bodies
  • Promoting high quality actuarial work
  • Ensuring that it is effective and efficient, and has a corporate culture that supports its mission and regulatory role.

The FRC also sets out its proposed budget for 2017/18 for expenditure and funding.  Overall the funding requirement is expected to increase by 4% from £34.6m to £36.0m.  

The full details of the plan and budget and press release can be obtained from the FRC website.  Our previous story on the draft plan and budget sets out further information on the background behind these areas of focus.

The Bruce Column — The struggles to make disclosure principled

30 Mar 2017

The IASB has published its long-awaited discussion paper on Principles of Disclosure and now everyone has six months to grapple with the important questions it raises. Robert Bruce, our regular, resident commentator looks at where the answers may lie.

It is the traditional Catch-22 of financial disclosure. Create a mass of requirements and all you will see is checklist and boilerplate information. Remove some of the requirements in an attempt to encourage judgement and what you get is complaints from investors that they are being denied information. Furthermore if you want a degree of consistency preparers need disclosure objectives to exercise their judgement.

There is also the question of whether you need to write out principles about good communication, or whether it should be down to common sense.

Although the debate has been with us for many years this is the IASB’s first attempt to step back, rethink and try to steer an effective way through these issues. The IASB has produced a discussion paper on Principles of Disclosure.

It all comes down to a deceptively simple question: deciding what to disclose and how to disclose it. But as soon as anyone gets into the detail they realise that the IASB’s current Standards are full of uncertainties. For example it is not clear whether IFRS information should be allowed to be disclosed outside the financial statements and whether non-IFRS information is allowed to be disclosed within the financial statements.

The complexities are rife. During the discussions the IASB realised that it would not be operational to prohibit the disclosure of non-IFRS information within the financial statements because there are differing views of what constitutes non-IFRS information. One example: the IASB requires entities to report (unspecified) subtotals where relevant and to report management determined segment information. Are these numbers IFRS measures or non-IFRS information?

Another issue that the IASB has struggled with in the past is that it knows that users need information that helps them analyse performance and it also knows that it would be helpful to separate out items which mask underlying performance. We are back to the old arguments over a decade ago about ‘extraordinary’ items. The IASB is thinking about developing requirements for the presentation of unusual or infrequently occurring items in the statement of financial performance. And it is thinking of clarifying the presentation of EBITDA and EBIT and creating a bit more structure around these frequently used KPIs. For example it suggests that EBITDA could be presented only if expenses are classified by nature, while EBIT could be presented regardless of whether expenses are classified by nature or by function.

Another area that the discussion paper is trying to tackle is the disclosure of accounting policies, and the problems of laborious and lengthy generic wording copied verbatim from IFRS in an unspecific way cluttering up and obscuring disclosures. The idea is to create several categories of accounting policies. The first category would be for policies that are essential to understanding information in the financial statements because the amounts involved are material and they involve choice or significant judgments or assumptions. The second category would be of items which do not fall into the first but relate to items that are material to the financial statements. The rest falls into the third category. For this tier disclosure is deemed not be necessary, but it would not be prohibited as long as they don’t clutter up or obscure material information or the financial statements generally. In other words accounting policies relating to items in categories one and two have to be explained.

One of the more radical suggestions is to have a two-tiered approach to disclosure requirements that would be less prescriptive and put greater emphasis on judgement in deciding how and what to disclose. You first decide how important a particular issue is to the company. The more important it is the more information a reader should expect to see about that activity. 

The discussion paper leaves everyone with a lot to think about. There are complexities and uncertainties. Will it be possible to create more structure? What role should management judgement be allowed to play? The next six months gives everyone an opportunity to put their views across.

IASB publishes discussion paper on disclosure principles

30 Mar 2017

The International Accounting Standards Board (IASB) has published a comprehensive discussion paper (DP) setting out the Board's preliminary views on disclosure principles that should be included in a general disclosure standard or in or in non-mandatory guidance on the topic. Comments are due 2 October 2017.

Background

For the years 2017-2021 the IASB has chosen "Better communication" as its central theme, and in addition to the primary financial statements project and the IFRS Taxonomy this also includes the disclosure initiative. A related project is also the Conceptual Framework project. In fact, some concepts and financial reporting issues have been moved back and forth between different projects of this group.

The disclosure initiative itself is made up of a number of projects:

  • Amendments to IAS 1 to remove barriers to the exercise of judgement and amendments to IAS 7 to improve disclosure of liabilities from financing activities have already been completed.
  • Guidance on the application of materiality has been split into two projects and will see a final practice statement and an exposure draft of proposed amendments to IAS 1 and IAS 8 published in June.
  • Of the two research projects that are included in the disclosure initiative, the principles of disclosure project is the one behind the DP published today and the standards-level review of disclosures is also involved to a degree as Section 8 contains a possible approach that could be explored further as part of the project and the appendix to the DP contains two examples of how existing standards could be re-drafted using the principles described in the DP.

 

The IASB's project on the principles of disclosure

The objective of the principles of disclosure project is to help preparers to communicate information more effectively, to improve disclosures for users of financial statements, and to help the Board to develop disclosure requirements in standards. Since IAS 1 Presentation of Financial Statements contains general requirements for disclosures in the financial statements, the project uses the IAS 1 requirements as a starting point to see whether parts of IAS 1 can be amended to reach the project's objective or whether a new disclosure standard should be developed to replace parts of IAS 1 (both options a subsumed under the expression "general disclosure standard" throughout the DP).

 

Summary of main proposals

Contents. The DP contains 110 pages and is divided into eight sections accompanied by an appendix. The paper is preceded by an executive summary describing the reasons behind publishing the DP, its reach, the main content of the document, the preliminary views of the Board, the terminology used, and the next steps. The paper itself is structured as follows:

Section Topic
1 Overview of the ‘disclosure problem’ and the objective of this project
2 Principles of effective communication
3 Roles of the primary financial statements and the notes
4 Location of information
5 Use of performance measures in the financial statements
6 Disclosure of accounting policies
7 Centralised disclosure objectives
8 New Zealand Accounting Standards Board staff’s approach to drafting disclosure requirements in IFRS Standards
Appendix Illustration of applying Method B in Section 7

The key issues dealt with in each section are summarised below.

Section 1 (Overview of the ‘disclosure problem’ and the objective of this project). The first section offers background information on the disclosure initiative and discusses the "disclosure problem" that demonstrates the need for principles of disclosure. The section also outlines the objective of the project and the DP and describes the interactions with the other IASB projects.

Section 2 (Principles of effective communication). The core of this section are the principles the Board believes entities should apply when preparing financial statements. Seven principles are identified ranging from the principle that the information provided should be entity-specific to avoid generic, ‘boilerplate’ language or information to the principle that the information should be provided in a format that is appropriate for that type of information. Except for one, these principles were originally included in the 2013 Conceptual Framework DP. The Board has come to the conclusion that these principles should be provided either in a general disclosure standard or in non-mandatory guidance on the topic, not in the Conceptual Framework. New is the principle on formatting as the Board has received feedback that more effective use of formatting would improve how entities communicate information.

Section 3 (Roles of the primary financial statements and the notes). This section contains a discussion of the roles of the different financial statements as the Board has received feedback that information in the primary financial statements is used more frequently and is subject to more scrutiny from users, auditors, and regulators. Entities also state that they find it difficult to decide what information should be presented in the primary financial statements instead of being disclosed in the notes, not least because of the inconsistent use of the terms ‘present’ and ‘disclose’ in IFRSs. Therefore, this section identifies and describes the role of the primary financial statements based on the objective of financial statements in the 2015 Conceptual Framework ED and sets out the implications of that role. It also describe the role and content of the notes based on the proposals in the Conceptual Framework ED. The Board has also concluded that going forward it will also specify the intended location as being either ‘in the primary financial statements’ or ‘in the notes’ when it uses the terms 'present' or 'disclose' to indicate a location.

Section 4 (Location of information). This section discusses providing information that is necessary to comply with IFRSs outside the financial statements and providing non-IFRS information within the financial statements. The Board’s preliminary view is that a general disclosure standard should include a principle that an entity can provide information that is necessary to comply with IFRSs outside of the financial statements if the information it is provided within the entity’s annual report and this location makes the annual report as a whole more understandable and if is clearly cross-referenced. Similarly, the Board has concluded that a general disclosure standard should not prohibit an entity from including non-IFRS information in its financial statements as long as such information is clearly identified as not being prepared in accordance with IFRSs and the entity explains why the information is useful and has been included.

Section 5 (Use of performance measures in the financial statements). The fifth section is dedicated to the fair presentation of performance measures in the financial statements. The Board’s preliminary views are that the presentation of an EBITDA subtotal using the nature of expense method and the presentation of an EBIT subtotal under both a nature of expense method and a function of expense method comply with IFRSs if such subtotals are relevant to an understanding of the financial statements. The Board also believes that it should develop guidance in relation to the presentation of unusual or infrequently occurring items. However, the Board notes that both issues (EBITDA/EBIT and unusual items) will be dealt with within the Board’s project on primary financial statements. On fair presentation of performance measures, the Board notes that this information must be displayed with equal or less prominence than the line items in the primary financial statements, reconciled to the most directly comparable IFRS measure, accompanied by an explanation of its relevance and reason, be neutral, free from error and clearly labelled, include comparative information, be classified, measured and presented consistently, and indicate whether it has been audited. This is entirely in line with guidelines already published by various securities regulators but now finds its way into IFRS literature.

Section 6 (Disclosure of accounting policies). In this section, the IASB takes a closer look at how entities should disclose their accounting policies. The Board’s preliminary views are that a general disclosure standard should include requirements to explain the objective of providing accounting policy disclosures. It should describe the categories of accounting policies, which are accounting policies that are always necessary for understanding information in the financial statements, accounting policies that also relate to items, transactions or events that are material to the financial statements, and any other accounting policies. The Board has also come to the conclusion that there are alternatives for locating accounting policy disclosures, but that it can be presumed that entities disclose information about significant judgements and assumptions adjacent to disclosures about related accounting policies.

Section 7 (Centralised disclosure objectives). This section discusses the development of a central set of disclosure objectives that consider the objective of financial statements and the role of the notes. Such centralised objectives could be used by the Board as a basis for developing disclosure objectives and requirements in standards that are more unified and better linked to the overall objective of financial statements. The DP identifies two methods that could be used for developing centralised disclosure objectives: Method A would entail focusing on the different types of information disclosed about an entity’s assets, liabilities, equity, income and expenses; Method B focusing on information about an entity’s activities. The appendix to the DP provides two examples that illustrate the application of Method B to develop disclosure objectives and requirements. The DP notes that Board has not yet formed any preliminary views about the two methods. Finally, the DP asks whether respondents think that the Board should consider locating all disclosure objectives and requirements in IFRSs within a single standard (or set of standards) for disclosures.

Section 8 (New Zealand Accounting Standards Board staff’s approach to drafting disclosure requirements in IFRS Standards). The eighth section describes an approach that has been developed by the staff of the NZASB for drafting disclosure objectives and requirements in IFRSs. The main features of the approach are: an overall disclosure objective for each standard with subobjectives for each type of information required, a two-tier approach that would see the amount of information provided depend on the relative importance of an item or transaction to the reporting entity, greater emphasis on the need to exercise judgement, and less prescriptive wording in disclosure requirements. The DP notes that Board has not yet formed any views about the approach but would nevertheless welcome feedback as it could be used in the project on standards-level review of disclosures.

The IASB allows constituents an extended six months period to work their way through the document and to respond to the questions raised; hence, comment letters are to be submitted by 2 October 2017.

 

Additional information

 

FRC to review sanctions imposed under its enforcement procedures

30 Mar 2017

The Financial Reporting Council (FRC) has commissioned an independent review of the sanctions imposed under its enforcement procedures.

The review will consider matters such as:

  • Whether the reasons for imposing sanctions set out in its guidance and policies remain appropriate.
  • The fairness and effectiveness of the range of sanctions available under the enforcement procedures.
  • Whether the financial penalty sanctions are adequate to safeguard the public interest and deter wrongdoing. 

The review will be conducted by an independent panel. 

The press release is available on the FRC website.

*Update 11/05/2017 - the independent review panel to conduct the review has issued a call for submissions and evidence.  A report setting out the findings will be published.  The deadline for responding is 30 June 2017.  The press release is available on the FRC website*

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