April

IPSASB review of developments 2015-2016

25 Apr, 2017

The International Public Sector Accounting Standards Board (IPSASB) has published '2015-2016 Biennial Review: Sustaining the Momentum'.

The publication summarises the IPSASB’s achievements, challenges, and key developments in 2015 and 2016 and can be downloaded from the IPSASB website.

EFRAG TEG meeting May 2017

24 Apr, 2017

The European Financial Reporting Advisory Group (EFRAG) will hold a TEG meeting on 10 and 11 May 2017 in Brussels.

An agenda and details on how to register for the meeting can be found on the EFRAG website.

Charity Commission publishes reviews into the quality of charity annual reports and accounts

24 Apr, 2017

The Charity Commission has published the findings of three reviews which looked at whether charity annual reports and accounts meet user needs for both smaller (under £25k) and over £25,000 (larger) income brackets; and at how well charities are meeting their public benefit reporting requirements.

Larger Charities 

The first report, Do charity annual reports and accounts meet the reader’s needs? focuses on whether the set of accounts reviewed “met the basic requirements of the users of those accounts rather on strict technical compliance with the Statement of Recommended Practice (SORP) and other reporting requirements”.  The following criteria were assessed:

  • have the trustees filed all of the required documents that make up a set of accounts (the annual report, independent scrutiny report and the accounts) and are they transparent and internally consistent in what is reported?
  • does the annual report explain what activities the charity had carried out during the year to achieve its purposes?
  • have the accounts been subject to the required level of independent scrutiny depending on the charity’s income and gross assets, either an audit or an independent examination?
  • have the accounts been prepared on the correct basis depending on the charity’s income and type, either receipts and payments or accruals accounts (also known as SORP accounts)?
  • do the accounts contain both a statement of financial activities (SOFA) that analyses the charity’s expenditure and a balance sheet and are they consistent with each other (or the equivalent if receipts and payments accounts were prepared)? 

Samples of charity accounts, with incomes over £25,000, were taken from the register of charities in September 2016. 107 charities were reviewed for accounting years ending during the 12 months to 31 March 2015. 

It was found that 75% of charity accounts in 2014/15 were of “acceptable quality”.  This shows a slight decrease on the figure of 77% in last year’s review.  It was also found that there was a “high level of compliance” with several of the above criteria being measured.  However, 27 charities within the sample were assessed to have not met the basic standard.  Key reasons included: 

  • The accounts as a whole were inconsistent or not transparent.
  • The accounts did not balance or were incomplete.
  • A proper independent examination had not been carried out.
  • The annual report did not cover the charity’s objectives and/or its charitable activities.
  • One or more of the annual report, independent scrutiny report and the accounts were missing. 

The Charity Commission highlights that “it is a statutory requirement to prepare an annual report and accounts and arrange for them to be subject to independent scrutiny, if required”.  It reminds Charities that there are a number of resources to assist trustees and independent examiners on the preparation and scrutiny of the annual report and accounts.  

Smaller charities 

The second report, Do small charity annual reports and accounts meet the reader’s needs?, focuses on whether each set of accounts reviewed “met the basic requirements of the users of those accounts rather than on strict technical compliance with the reporting requirements”.  The following criteria were assessed: 

  • have the trustees provided both an annual report and accounts?
  • does the annual report explain what activities the charity had carried out during the year to achieve its purposes?
  • do the accounts contain both an analysis of receipts and payments and a statement of assets and liabilities and are these consistent with each other (or the equivalent if accruals accounts (also known as SORP accounts) were prepared)? 

Samples of charity accounts, with incomes less than £25,000 reported in their annual returns were selected.  109 charities were reviewed for accounting years ending during the 12 months to 31 March 2015. 

It was found that 55% of charity accounts in 2014/15 were of “acceptable quality”.  This shows an increase on the figure of 47% in last year’s review.  The Charity Commission indicates that “the charities that met our basic standard had provided both an annual report that covered their objectives and charitable activities and accounts that were complete, understandable and internally consistent”.  However, 49 charities within the sample were assessed to have not met the basic standard.  Key reasons included: 

  • Both the annual report and accounts were provided, but key information was missing.
  • Either the annual report or the accounts were not provided.
  • Neither the annual report nor the accounts were provided. 

The Charity Commission reminds trustees that all registered charities must prepare an annual report and accounts and make them publicly available.  

As with the larger charities, the Charity Commission reminds charities that there are a number of resources to assist trustees on the preparation of the annual report and accounts. 

Public benefit reporting 

The third report, Public benefit reporting by charities, looked at the quality of public benefit reporting.   All registered charities are required to publish a trustees’ annual report which sets out the activities that the charity has undertaken for the public benefit. Charities are also required to include a statement as to whether they have had due regard to the Charity Commission’s guidance on public benefit.  

The report reviews public benefit reporting of 107 charities for financial years ending in the 12 months to 31 March 2015. 

Findings indicate that the percentage of charities’ annual reports that demonstrated a clear understanding of the public benefit reporting requirement remained consistent with the prior year (45%) at 46%.  The Charity Commission found that 90% of the annual reports reviewed discussed what the charity was set up to do and its activities during the year, however many did not then go on to consider what difference they had made to their beneficiaries and/or include the required statement that the trustees had considered the Charity Commission guidance on public benefit reporting.  58 charities in the sample were assessed to have not met the public benefit reporting requirement.  Key reasons include: 

  • The annual report included a public benefit statement but it did not explain who benefits from the charity’s activities.
  • The annual report explained who benefited from the charity’s activities but did not include a public benefit statement.
  • The annual report did not explain who benefits from the charity’s activities and did not include a public statement. 

The Charity Commission comments; “if the purpose of the charity sector is to make a difference to the lives of the beneficiaries it serves, too few charities are reporting fully on how well they are doing”. 

Click for (all links to Charity Commission website):

Recent integrated reporting developments

24 Apr, 2017

A summary of recent developments at the IIRC and ACCA.

The Banking Network of the International Integrated Reporting Council (IIRC) has released Innovation in banking - are we communicating the value created?. The paper focuses on the need for businesses to innovate to remain competitive and shows how the IIRC's Framework provides a useful tool to help banks think about innovation that can lead to increases in financial and intellectual capitals in later periods. Please click to access the publication on the IIRC website.

The Association of Chartered Certified Accountants (ACCA) has published a report which highlights the benefits and challenges that early integrated reporting adopters have experienced and gives practical recommendations to those that are yet to adopt. 

IASB proposes amendments to IFRS 9 regarding the classification of certain prepayable financial assets

21 Apr, 2017

The International Accounting Standards Board (IASB) has published an exposure draft 'Prepayment Features with Negative Compensation (Proposed amendments to IFRS 9)' to address the concerns about how IFRS 9 'Financial Instruments' classifies particular prepayable financial assets. Comments are requested by 24 May 2017.

 

Background

The Board's consideration of this matter were triggered by a submission to the IFRS Interpretations Committee. The Committee noted that under IFRS 9 Financial Instruments certain prepayment options would preclude instruments that otherwise only feature contractual cash flows that are solely payments of principal and interest from being measured at amortised cost or fair value through other comprehensive income. Problematic in this case are prepayment features where the lender could be forced to accept a prepayment amount that is substantially less than unpaid amounts of principal and interest because this would constitute a payment to the borrower by the lender and not a compensation from the borrower to the lender. The Interpretations Committee was convinced that using amortised cost measurement could provide useful information in this case and asked the Board to consider adding a narrow-scope exception to IFRS 9.

 

Suggested changes

The Board followed the Interpretations Committee's reasoning and therefore ED/2017/3 Prepayment Features with Negative Compensation (Proposed amendments to IFRS 9) proposes a narrow exception to IFRS 9 for particular financial assets that would otherwise have contractual cash flows that are solely payments of principal and interest but do not qualify for amortised cost or fair value through other comprehensive income measurement as a result of a prepayment feature.

The Board proposes that such a financial asset would be eligible to be measured at amortised cost or at fair value through other comprehensive income (depending on a company's business model) if two conditions are met:

  • the assessment that the prepayment amount is not solely a payment of principal and interest on the principal amount outstanding only hinges on the fact that the party that chooses to terminate the contract early may receive reasonable additional compensation for doing so; and
  • when the entity initially recognises the financial asset, the fair value of the prepayment feature is insignificant.

The ED also contains proposed amendments to IFRS 7 and IFRS 1 for cases where it is impracticable to assess whether the fair value of a prepayment feature was insignificant at initial recognition.

 

Effective date and transition requirements

The proposed effective date of the amendments is 1 January 2018 (to coincide with the effective date of IFRS 9). The exception would be applied retrospectively, however, certain relief is granted if at the date of initial application it is impracticable for an entity to assess whether the fair value of a prepayment feature was insignificant at initial recognition of the financial asset.

 

Comment deadline

The IASB argues that the matter is narrow in scope and urgent and has therefore set a comment period of 30 days instead of the standard minimum period of 120 days. Consequently, comments on the ED are requested by 24 May 2017.

 

Next steps

In order to meet the intended effective date of 1 January 2018, the Board follows a very tight project timeline. After the end of the comment period in May, the Board intends to redeliberate the issue in June and July 2017 and (if it decides to proceed with the proposed amendments) issue a final amendment by the end of October 2017.

 

Additional information

Please click for:

EFRAG TEG conference call

21 Apr, 2017

The European Financial Reporting Advisory Group (EFRAG) will hold a TEG conference call on 26 April 2017.

An agenda and documents for the conference call can be found on the EFRAG website.

Agenda and pre-meeting summaries for the May 2017 IFRS Interpretations Committee meeting

20 Apr, 2017

The IFRS Interpretations Committee will meet via Video Conference Call on Wednesday 3 May 2017. It is scheduled to be a one hour meeting, to discuss one new issue. The staff will also identify the new issues that have come to them that they are still analysing for future meetings.

New issue

The Committee will consider whether a financial instrument, classified as equity by the issuer in accordance with IAS 32.16A-16D, is eligible for FVTOCI classification in terms of IFRS 9.4.1.4. The staff believe that it is clear that such instruments are not eligible for the OCI presentation election and that the Committee should not add this issue to its agenda.

The full agenda and the pre-meeting summaries for the meeting can be found here. We will update this page for our Deloitte observer notes from the meeting as they become available.

ITCG call for members

20 Apr, 2017

The IASB's IFRS Taxonomy Consultative Group (ITCG) is seeking to fill two open positions.

The ITCG is a consultative group established to assist the IASB in its activities related to the IFRS Taxonomy used when tagging financial information using XBRL (eXtensible Business Reporting Language).

The deadline for applications for membership is Thursday, 1 June 2017. Please click for more information in the press release on the IASB website.

ACCA report highlights benefits and challenges of adopting Integrated Reporting

20 Apr, 2017

The Association of Chartered Certified Accountants (ACCA) has published a report which highlights the benefits and challenges that early Integrated Reporting (<IR>) adopters have experienced and gives practical recommendations to those that are yet to adopt.

The findings are drawn from a review of 41 corporate reports by participants in the <IR> Business network which consists of organisations committed to adopting <IR>.  Interviews were also conducted with some of the report preparers.  The review highlights that there was “a high overall level of reporting quality” by <IR> Business Network participants but that “organisations find some aspects of <IR> particularly challenging”.  

A number of benefits of adopting <IR> were identified by participants including:

  • More integrated thinking and management.
  • Greater clarity on business issues and performance. The report highlights that “management teams are finding that <IR> provides greater insights into factors driving business performance”.
  • Improved corporate reputation and stakeholder relationships.
  • More efficient reporting for both users and preparers of reports.
  • Employee engagement.
  • Improved gross margins although it was highlighted that any financial benefits of adopting <IR> may take time to realise. 

Additionally, the report identifies several areas where reporting can be improved, something it calls “common areas of weakness”.  These include:

  • Value creation: It was observed that, in some cases, organisations gave better explanations of how the organisation creates value itself than of how it does this for others with some organisations finding it hard to distinguish between the two. The report notes that this may be a “general weakness” in identifying and articulating what the organisation’s stakeholders perceive as ‘value’.  The report identifies the following good practice ideas for reporting on value creation:
    • Clearly identify who the organisation’s key stakeholders are, and engage with them to find out what value means for them.
    • Use the six capitals model as a reference tool for considering how the organisation’s strategy and business model will affect each of these capitals.
    • Use the understanding of what value means for key stakeholders, and the multiple capitals approach, to inform the organisation’s business model, strategy, risk management and performance measurement processes.
    • Refer to existing frameworks and sector guidance as a starting point for defining relevant performance indicators.
  • Connectivity: companies identified this as one of the biggest challenges with implementing <IR>: it required breaking down silos within the organisation and changing existing data collection processes. The report indicates that “almost half the reports reviewed could be better at showing the connectivity of information, to give a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organisation’s ability to create value over time”.  The report identifies the following good practice ideas for connectivity:
    • Consider approaching the integrated report as an overarching, concise document that connects other more detailed reports and regulatory information.
    • Use clear signposts directing readers to connected information within the integrated report and elsewhere, including online reports.
    • Think about connections between management information, boardroom discussions and priority topics relevant for investors and other stakeholders.
  • Defining performance measures: thinking and practice is still immature in articulating the value organisations derive from non-financial capitals.
  • Materiality: companies found it challenging to reconcile the needs of different stakeholders. The report highlights that only 46% of reports reviewed explained the materiality determination process well.  Improving the materiality determination process could help drive improvements in conciseness, completeness and reliability.  The report identifies the following good practice ideas for materiality:
    • Identify who the main user of the integrated report is, and determine materiality accordingly – this will help to determine what to include and what to exclude.
    • Clearly explain the process for assessing materiality, including how the organisation has evaluated and prioritised material issues.
  • Conciseness: nearly half of the integrated reports reviewed ran over 150 pages. Companies found it difficult to reconcile conciseness and meaningful communication with stakeholders. The report identifies the following good practice ideas for conciseness:
    • Identify relevant matters to report by implementing robust materiality determination processes – this would also help to improve reliability and completeness.
    • Apply the robust materiality determination process to filter out matters to exclude (ie those not material to value creation) when evaluating their relative importance.
    • Use cross-references (internally and externally to other reports) and make effective use of tables and diagrams.
    • Consider how digital technology could help meet wider stakeholder information needs.
  • Reliability and completeness: the reviewers felt that only 51% of the reports reviewed achieved a balance of good and bad news in equal measure. Companies need to know what ‘good reporting’ looks like, before they can implement internal control processes and consider external assurance on their integrated report. The report identifies the following good practice ideas for reliability and completeness:
    • Ensure that the board exercises oversight of reporting content.
    • Establish sound internal control processes for data to be included in integrated reports.
    • Identify the relevant standards and frameworks used, and disclose them in the report.
    • Report information used by management in running the business.
    • Clearly explain why particular KPIs are used and the reason for any changes in reported KPIs.
    • Disclose negative aspects of performance as well as positive aspects, and explain what management will do to tackle challenges. 

By identifying the benefits of <IR> and sharing practical recommendations it is hoped that the report will “give businesses – as well as public sector organisations – the confidence to embark on their integrated reporting journey”.

The press release and full report Insights into Integrated Reporting – Challenges and best practice responses are available on the ACCA website.

IESBA launches online survey seeking stakeholder views on its future direction

20 Apr, 2017

The International Ethics Standards Board for Accountants (IESBA) has launched an online survey seeking comments, views, and insights from all stakeholders to help shape its future direction.

The survey which closes on 18 July, seeks early input onto the key issues the IESBA should address that might impact its Code Of Ethics for Professional Accountants and is the first step of the IEABS’s strategy and work plan beyond 2018. 

The press release is available on the IESBA website.  The online survey is available here.

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