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August

'Introducing EFRAG'

31 Aug 2017

The European Financial Reporting Advisory Group (EFRAG) has published a brochure offering a compact introduction to the organisation.

It briefly outlines how the organisation delivers on its mandate of being the European voice in financial reporting. It also puts the spotlight on EFRAG's three core activities: upstream influence through evidence-based research; contributing to the development of IFRS; and providing endorsement advice to the European Commission, including the European public good assessment.

Please click to access the 8 page publication Introducing EFRAG.

Government to set new legislation to take forward its corporate governance reforms

30 Aug 2017

The Government has set out its plans to move forward with its corporate governance reforms following its Green Paper issued last November and also the BEIS Select Committee inquiry into corporate governance which reported in April 2017.

The proposals will be introduced through a number of different mechanisms including secondary legislation, changes to the UK Corporate Governance Code and other industry-led solutions.

The proposals set out in the paper issued today cover the three topics raised in the Green Paper:

  • Executive pay;
  • Strengthening the employee, customer and supplier voice;and
  • Corporate governance in large privately-held businesses.

Executive pay

Secondary legislation will be introduced requiring quoted companies to:

  • Report annually the ratio of CEO pay to the average pay of their UK workforce together with a narrative explaining changes in the ratio from year to year and setting the ratio in the context of pay and conditions across the wider workforce;
  • Provide a clearer explanation in their remuneration policies of a range of potential outcomes from complex, share-based incentive schemes.

The FRC will be invited to revise the UK Corporate Governance Code to:

  • Be more specific about the steps that premium listed companies should take when there is significant shareholder opposition to executive pay policies and awards;
  • Extend the remit of remuneration committees to also oversee pay and incentives across their company and to require those committees to engage with the wider workforce to explain how executive remuneration aligns with wider company pay policy; 
  • Extend the recommended minimum vesting and post-vesting holding period for executive share awards from 3 to 5 years; and
  • Include a proposed new provision that the chair of the remuneration committee should have served for at least 12 months on a remuneration committee unless there is a clear and valid reason why this is not appropriate or possible.

The Investment Association will be asked to develop and maintain a public register of listed companies encountering more than a 20% or more shareholder vote against pay awards, along with a record of what these companies say they are doing to address shareholder concerns.

The Government has considered and rejected any further measures in relation to shareholder committees, mandatory disclosure of voting records, increasing retail investor voting or adding further regulation to the existing disclosure framework for bonus targets.

Further, the Government is not convinced that long term incentive plans should be abolished but does agree that companies should avoid conforming rigidly to a standard model and should consider adopting other structures which may be more appropriate. The paper notes that this will require investors to be open to new and novel approaches put forward by companies.

Strengthening the employee, customer and wider stakeholder voice

Secondary legislation will be introduced requiring all companies of significant size (both public and private - suggested to be a threshold of 1,000 employees but will be subject to further consideration) to explain how their directors comply with the requirements of section 172 of the Companies Act 2006 to have regard to employee interests and to fostering relationships with suppliers, customers and others.

The FRC will be invited to include a new Code principle strengthening the voice of employees and other stakeholder interests at board level when it consults on changes to the Code later this year. Further, a specific Code provision is suggested requiring premium listed companies to adopt, on the “comply or explain” basis, one of three employee engagement mechanisms: a designated non-executive director; a formal employee advisory council; or a director from the workforce.

The ICSA and the Investment Association will be asked to complete their joint guidance on practical ways in which companies can engage with their employees and other stakeholders at board level. In addition, the GC100 has been asked to publish new advice and guidance on the practical boardroom interpretation of the directors’ duty in section 172.

Corporate governance in large privately-held businesses

Secondary legislation will be introduced to require all companies of a significant size to disclose their corporate governance arrangements in their Directors’ Report and on their website, including whether they follow any formal code. The Government’s initial view is that these requirements should apply to companies with more than 2,000 employees. A similar requirement for Limited Liability Partnerships of similar scale will also be considered.

The FRC will be invited to work with the Institute of Directors, the CBI, the Institute of Family Business, the British Venture Capital Association and others to develop a voluntary set of corporate governance principles for large private companies under the chairmanship of a business figure with relevant experience.

Other issues considered in the paper

Boardroom diversity – the paper acknowledges the wider work that the Government and others are undertaking to enhance and encourage corporate responsibility including the Hampton-Alexander review on gender diversity and the work of Sir John Parker and Baroness McGregor-Smith on ethnic diversity in the boardroom and the workforce. The government believes that the reforms outlined above complement these initiatives.

FRC powers – in order to ensure the most effective powers to sanction directors and ensure the integrity of corporate governance reporting, the FRC, the Financial Conduct Authority and the Insolvency Service will be asked to conclude new or, in some cases, revised letters of understanding with each other before the end of this year.

Share buybacks - the Government plans to take forward its manifesto commitment to examine the use of share buybacks to ensure that they cannot be used to artificially hit performance targets and inflate executive pay. The review will also consider whether share buybacks are crowding out the allocation of surplus capital to productive investment.

Next steps

The Government responds in this paper and in a response published on 22 September 2017 to the BEIS Select Committee’s enquiry into corporate governance.

The current intention is to bring the reforms into effect by June 2018 to apply to company reporting years commencing on or after that date.

The Government intends to lay before Parliament draft secondary legislation before March 2018. Where necessary, there will be consultation on the detail of the secondary legislation and draft statutory instruments will be published later this year.

The FRC intends to consult on amendments to the UK Corporate Governance Code in the late Autumn.

The work on developing voluntary corporate governance principles for large private companies will commence in the Autumn.

Further information (links to BEIS website)

FRC launches new website

30 Aug 2017

The Financial Reporting Council (FRC) has launched a redesigned and restructured website. The new site introduces a modern design with features to support the FRC’s role in promoting transparency and integrity in business.

The new design, which has been developed after gathering feedback from stakeholders about what they want to see from the FRC, will allow stakeholders to select options most relevant to their needs with a smoother navigation through to news, reports and other information. 

The FRC has been working to ensure that broken links from the existing website are minimised.  All of the links from the existing website have been added to their respective new locations.  However, where a broken link is found, there is a dedicated ‘404’ page with a bespoke email address where this may be reported.

A press release containing further information is available on the FRC website here.

AAOIFI proposes standard on impairment and credit losses

28 Aug 2017

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia'a standards for Islamic financial institutions and the industry. The newest exposure draft published by the AAOIFI deals with impairment and credit losses covering current and expected losses.

Although the AAOIFI is part of the IASB's consultative group on Sharia'a-compliant instruments and transactions, the new proposed standard FAS 30 Impairment and credit losses is not converged with the corresponding requirements in IFRS 9 Financial Instruments. Rather, discussions at an expert workshop co-hosted by the AAOIFI and the IASB in 2015 to discuss the matters that Islamic financial institutions may have to deal with when applying the IFRS 9 formed the basis for developing the proposals in the exposure draft now published.

Please click to access the exposure draft on the AAOIFI website. Comments are requested by 30 September 2017.

IPSASB publishes financial instruments ED based on IFRS 9

25 Aug 2017

The International Public Sector Accounting Standards Board (IPSASB) has published an exposure draft (ED) to improve public sector reporting on financial instruments.

ED 62 Financial Instruments is based on IFRS 9 Financial Instruments and is intended to replace IPSAS 29 Financial Instruments: Recognition and Measurement, which is based on IAS 39. The new standard will introduce simplified classification and measurement requirements for financial assets, a forward looking impairment model, and a flexible hedge accounting model. Consistent with the relief provided in IFRS 9, the IPSASB proposes to allow an option for entities to continue to apply the IPSAS 29 hedging requirements.

The IPSASB applied its process for reviewing and modifying IASB documents to the requirements in IFRS 9 with the aim of keeping public sector requirements as closely as possible in line with IFRS while also including appropriate public sector specific modifications where necessary. Therefore, ED 62 includes public sector specific guidance on financial guarantees issued through non-exchange transactions and concessionary loans and examples illustrating how to apply the principles in ED 62 to transactions that are unique to the public sector.

In view of the significant chnages proposed, the IPSASB intends to provide a three year implementation period for the new standard. Early adoption will be permitted.

Please click to access the press release on the IPSASB website. The IPSASB's consultation page offers access to the ED and comprehensive background material, including a comparison between the requirements in IFRS 9 and those in ED 62.

Comments are requested by 31 December 2017.

Summary of the June 2017 joint CMAC-GPF meeting

23 Aug 2017

Representatives from the International Accounting Standards Board (IASB) met with both the Capital Markets Advisory Council (CMAC) and Global Preparers Forum (GPF) in London on 15 and 16 June 2017. Notes from the joint meeting have now been released.

The topics discussed at the meeting included:

  1. IASB update;
  2. Discussion Paper Principles of Disclosure;
  3. Primary financial statements and comparability and flexibility in performance reporting;
  4. Post-implementation review of IFRS 13 Fair Value Measurement;
  5. Impairment testing of goodwill;
  6. Preparers’ views on the proposals in the Exposure Draft Improvements to IFRS 8 'Operating Segments'.

Items (2) to (5) were also discussed in small break-out groups.

The next GPF meeting will be held on 4 October 2017; the next CMAC meeting will take place on 20 October 2017.

For more information, see the meeting page and the meeting summary on the IASB's website.

Hyperinflationary economies - updated IPTF watch list available

23 Aug 2017

IAS 29 'Financial Reporting in Hyperinflationary Economies' defines and provides general guidance for assessing whether a particular jurisdiction's economy is hyperinflationary. But the IASB does not identify specific jurisdictions. The International Practices Task Force (IPTF) of the Centre for Audit Quality (CAQ) monitors the status of 'highly inflationary' countries. The Task Force's criteria for identifying such countries are similar to those for identifying 'hyperinflationary economies' under IAS 29.

The IPTF's notes from the 16 May 2017 meeting are now available and state the following view of the Task Force:

Countries with three-year cumulative inflation rates exceeding 100%:

  • South Sudan
  • Ukraine
  • Venezuela

Countries where the three-year cumulative inflation rates had exceeded 100% in recent years:

  • Malawi
  • Sudan

Countries (a) with projected three-year cumulative inflation rates greater than 100%; (b) with projected three-year cumulative inflation rates between 70% and 100%; (c) where the last known three-year cumulative inflation rates previously exceeded 100% and current actual inflation data has not been obtained; or (d) with a significant increase in inflation during the current period

  • Argentina
  • Libya
  • Suriname
  • Angola
  • Yemen
  • Egypt
  • Mozambique

The report also notes that there may be additional countries with three-year cumulative inflation rates exceeding 100% or that should be monitored which are not included in the above analysis because the sources used to compile the list do not include inflation data for all countries or current inflation data. An example cited is Syria.

The full list, including exact numbers, detailed explanations of the calculation of the numbers, and observations of the Task Force are available on the CAQ website. We also offer an overview of the IPTF's assessment of hyperinflationary jurisdictions at the end of our summary of IAS 29.

IPSASB consults on accounting for revenue and non-exchange expenses

23 Aug 2017

The International Public Sector Accounting Standards Board (IPSASB) has published a consultation paper on potential recognition and measurement approaches for revenue and non-exchange expenses. The paper proposes updating existing IPSAS 23 'Revenue from Non-Exchange Transactions (Taxes and Transfers)' as well as to replace current IPSAS dealing with revenue arising from exchange transactions and construction contracts with an IPSAS based on IFRS 15.

The IPSASB's motivation for the proposed updates is to address some key IPSAS implementation issues, to maintain IFRS convergence, and to address gaps in literature that have been identified in accounting for non-exchange expenses.

For non-exchange transactions with performance obligations the paper discusses two potential revenue recognition approaches, one that maintains the principles within IPSAS 23 and one that builds on recognising revenue when identified performance obligations have been met.

The paper also offers two possible approaches for the recognition of non-exchange expenses. The first one relies on the IPSASB’s Conceptual Framework to determine when a resource provider has a liability and an expense while the second one mirrors the equivalent revenue approach.

The implementation issues addressed relate to the recognition of revenue from capital grants and services in-kind; initial and subsequent measurement of non-contractual receivables; and subsequent measurement of non-contractual payables.

Please click for the following additional information on the IPSASB website:

Comments are requested by 15 January 2018.

We comment on four IFRS Interpretations Committee tentative agenda decisions

21 Aug 2017

We have published our comment letters on IFRS Interpretations Committee tentative agenda decisions on IFRS 3, IAS 38, IAS 37, and IAS 28, as published in the June 2017 IFRIC Update.

More in­for­ma­tion about the issues is set out below:

Issue

Agenda decision supported?

More in­for­ma­tion

IFRS 3 Business Combination — Acquisition of a group of assets that does not constitute a business

Yes.

IAS 38 Intangible Assets — Goods acquired for promotional activities

Yes, however, we do not believe with the assertion that transaction described is within the scope of IAS 38.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets — Costs considered in assessing whether a contract is onerous

Yes.

IAS 28 Investments in Associates and Joint Ventures — Acquisition of an associate or joint venture from an entity under common control

Yes, however, we believe issues arising from common control transactions should be addressed holistically.

Click to access all our comment letters to the IASB, IFRS Foun­da­tion, and IFRS In­ter­pre­ta­tions Committee.

FRC annual seminar for audit committee members

18 Aug 2017

The Financial Reporting Council's (FRC's) annual seminar for audit committee members will take place on 4 October.

Discussions will focus on aspects of the FRC's work of particular relevance to audit committees and regulatory changes in the audit market.

Details on how to register for the meeting can be found on the FRC website.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.